HOW INSURANCE UNDERWRITING WORKS – PROFESSIONAL INSIGHTS FROM TGC ASIA

Every insurance company has teams of Underwriters. But what exactly do these people do, and how do they do it? Here’s some insight into how insurance underwriting works, and why it matters.

The underwriting process is an essential part of an insurance application. When you apply for cover, whichever type of policy you need, you are actually asking the insurance company to accept the potential risk of paying a claim in the future. As you can imagine, underwriters rely heavily on statistical evidence.

Statistical evidence in underwriting
The amount you pay for your insurance is calculated by looking at the profile of a large pool of similar risks to establish how likely it is that you will suffer a loss and make a claim. It involves gathering together as many similar risks as possible, then averaging them out to arrive at a sensible, evidence-based premium.

In life assurance, for example, underwriters have access to data about death rates that can go back hundreds of years and contain information about thousands or even millions of deceased policyholders. Studying this data gives life assurance underwriters the knowledge they need to predict the average likelihood of you dying at a certain age, based on your lifestyle, physical location, health and many more factors. Because life assurance sums insured tend to be high, life assurance application forms contain a lot of questions, and some insurers demand an actual medical health check to make sure you present an acceptable level of risk.

In life assurance underwriting, someone who smokes, drinks a lot of alcohol, is overweight and takes no exercise presents a worse than average risk of dying earlier than fit and healthy people who don’t smoke and who drink less alcohol. The fitter, healthier person will be asked to pay smaller premiums than the unfit, unhealthy person. In home owner insurance, someone who doesn’t fit window locks and doesn’t have strong locks on their exterior doors will probably pay more than someone who takes home security seriously. As you can see, it’s a fair system. In the insurance world we call it ‘equitable’.

Claims fraud makes premiums go up
In recent years there has been a lot of motor insurance claims fraud, by criminals who pretend to have accidents in their cars or even force innocent drivers into having accidents that they then claim for. This drives car insurance premiums up simply because there are more claims than the underwriters expected, and the carefully-calculated balance between premiums and pay-outs is damaged.

Specialist insurers like Lloyd’s of London insure risks that come without any statistical evidence to help their underwriters calculate a reasonable premium that properly reflects the risk. If, as a famous singer, you want to insure your best asset – for argument’s sake your vocal chords or your legs– Lloyd’s will insure them, using their expertise and all sorts of other information to come to a reasonably informed conclusion about the risk of a claim and the premiums needed to cover it.

When setting premiums, an underwriter also attempts to protect their employer from loss. If someone presents too much of a risk and is overly likely to make a claim they can be declined, in other words refused cover. In some cases they will be charged extra to cover the bigger risk they pose.

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