Underwriting is the process by which an insurance company determines if they should accept a risk, how much coverage should be provided, and the amount that should be charged for that coverage.1
Origin of the term “Underwriting”
Insurance is not a new concept, but property/casualty insurance as it is now known can be traced to a 17th century London coffeehouse. At the time, exploration of the world was expensive and fraught with perils, such as bad weather and pirates. The Lloyd’s Coffee House, owned by Edward Lloyd, became an important meeting place to learn about voyages and foreign trade, but also a place for those interested in profiting by investing in sea voyages. The interested parties would write their names under the text describing the possession or event for which they would assume risk – “underwriting.”2
How Underwriting Works
- Before accepting a risk, an underwriter will conduct background research and determine the degree of risk each applicant presents.
- This evaluation establishes appropriate premiums to sufficiently cover the actual cost of providing insurance for policyholders.
- The underwriter may decline coverage if the risk is determined to be too large.3
What Underwriters Do
- Underwriters assess the degree of risk for their employer, as well as the price to be charged to a business or individual.
- Underwriters use specialized software and actuarial data to determine the likelihood and size of the risk.4
Sources:
- TheInstitutes.org, “Property and Liability Insurance Principles”
- “Why Your Insurance Costs What It Does: A Risk-Based Pricing Primer”, NAMIC Advocacy
- Investopedia: What is underwriting?
- Investopedia: What is insurance underwriting?
