The average person has at least one if not multiple insurance policies, including car insurance, health insurance, and homeowners or renters insurance. If you have more than one insurance policy, you know that the premiums for different types of policies vary significantly. For example, earthquake insurance is notoriously expensive, while an umbrella policy is historically quite affordable.
So who decides how much a certain insurance policy will cost? Read on to learn more about the role of insurance underwriters in evaluating risk and pricing insurance policies.
The Role of an Underwriter
Interestingly, the term "underwriter" was first used over a century ago by Lloyds of London, a company that evaluated the risks assumed by financiers of sea voyages. On the document memorializing the deal, the banks would sign directly below the risk information, hence the term "underwriting." Today, underwriters are employed by insurance companies, and their role is to determine the company's risk for insuring a potential client.
Underwriters balance the insurance company's interest in being profitable against the likelihood of a client needing to use a particular policy. Underwriters work behind the scenes—not directly with clients like insurance brokers and agents—to price premiums for various types of insurance. Their role is to evaluate the risk of insuring a particular home, car, driver, business or individual. Most underwriters focus on a specific subset of insurance, for example, auto insurance or health insurance.
How Underwriters Evaluate Risk
Underwriters typically rely on computer programs that use algorithms and actuarial data to evaluate the insurance company's risk. The goal is to avoid potential exposure to claims that could result in an excessive payout on the part of the insurance company. The data sets used by underwriters break down potential customers by groups, and can predict their behavior. For example, data analytics can predict the expense of insuring a healthy person of a particular age, or someone with a certain family disease or who falls within a certain income bracket.
Depending on the type of insurance in question, underwriters consider different factors when reaching a figure. With health insurance, significant weight is given to the customer's personal history. For example, smoking is considered a high-risk behavior because smokers ultimately need more hospitalizations than non-smokers. With car insurance, underwriters consider a customer's driving history, location, credit score, type of vehicle, marriage status, gender, and education level. Likewise, risk assessment for life insurance includes consideration of a person's lifestyle, credit score, family health history, personal health, and dangerous hobbies.
After fully evaluating the risk to the insurance company, the underwriter sets a price for the premium that will be charged in exchange for the insurance company taking on the risk. If there are factors and criteria present that tend to suggest that an insurance company will likely need to make a larger payout over the life of the policy, then your premium for that particular insurance policy will be more expensive.
Get Legal Help with Insurance Underwriting
Understanding insurance premiums and other issues can sometimes be confusing. There are times when legal disputes can arise with insurance companies about premiums, policies, and coverage. If you have questions about legal aspects of insurance or underwriting, consult with a qualified local insurance law attorney.