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What Is Underwriting In Insurance And How It Works?

Zopper Team Basics of Insurance January 22nd, 2024
Underwriting in Insurance

What exactly is underwriting in insurance? In simple words, it pertains to a process by which an insurance company evaluates the risk factors while providing coverage for securing a customer’s health. 

If you are planning to buy life insurance, the first thing to consider is the coverage that you may opt for. Going for a cover that fits your pocket is crucial. While a premium calculator can calculate the premium instantly, do you know how insurance companies finalise the premium? How do you think it works? Will two people of the same age have the exact same premium? Read on to find out how underwriting plays an important role in insurance. 

How Does Underwriting Impact Your Insurance Cover?

When you apply for coverage, an insurance company works around your application to determine whether or not you are eligible for the policy. They follow a proper procedure to evaluate the risk they’ll have to bear if they insure you. This procedure is called underwriting. 

So, basically, through underwriting, the company assesses the extent of risk and decides whether the risk is acceptable or has to be rejected. It is a critical aspect as the company needs to maintain a healthy loss ratio. For the same reason, underwriting is said to be the core of the insurance business, as incorrect decisions can lead to higher losses. If incorrect analyses are made during the process of underwriting, the insurer may end up paying more in claims as compared to what it is making in premiums. 

Typically, the insurance underwriters review the application on the basis of your physical as well as financial health and process them on the basis of the risk attached. They assume the future risks and calculate the premium in order to cover these damages. 

The following factors are considered by the underwriters:

  • Your age and gender

  • Your and your family’s medical history. In case you suffer from a critical health issue, your application may be rejected

  • Your body weight determines the chances of you suffering from a health issue in the future

  • Your lifestyle habits. People who drink and/or smoke would have to pay a higher premium

  • Your occupation. A taxi driver has a riskier job as compared to a school teacher

  • Your driving and accidental records

  • Your net worth

  • Criminal record, if any

  • The amount of coverage that you have applied for

When buying insurance, you need to be realistic about the coverage you expect. Make sure it matches your ongoing medical and financial situation so that your application is not rejected. 

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