Where did underwriting begin?

Underwriting has a very long and interesting history. It’s believed to have been coined by insurer Lloyd’s of London, all the way back in 1750. The company would accept risk in exchange for premiums for ships and sea voyages. Should a ship capsize or sink, the owner of the ship could receive a portion of the initial cost.

Why is it called underwriting? Because applicants would literally write their names under the policy detailing Lloyd’s accepting the risk. Hence, under-writing. Don’t you just love history?

Ever since the good old days of shipping and traversing the ocean blue, underwriting eventually became an integral part of the insurance industry. From 1750 shipwrecks to automated machine learning in the palm of your hand, underwriting has been there, seen it all, and will continue to be a critical part of the process.

Ultimately, underwriters are there to analyze the data of an applicant, assess the risk of their request, and determine the scope of the coverage and premiums. Companies determine how much risk they can manage and remain viable then rely on underwriters to  determine which individuals will fit within the company’s risk tolerance. Think of it like this – underwriters create a risk profile  based on  a snapshot of an applicant and their situation, using all the appropriate data. When it’s all taken together, the underwriter determines your class, which determines price based on approval by your state’s department of insurance.

Types of insurance underwriters

That being said, not all underwriting is the exact same. That would be like saying all martial art disciplines are the exact same. Depending on the industry, underwriting can take on different forms and require different skill sets. They’ll also be looking at the appropriate information for your policy. Here are just some of the industries that utilize underwriting.

Life insurance

These underwriters determine the risk of life insurance policies. Basically, these underwriters want to know the likelihood of you dying during the term of the contract, and whether or not you can pay your premiums for the period of time requested. They do this by looking at your health information and lifestyle to see if anything would point to a high level of risk for the insurance company. Underwriters will look at height, weight, medical history, smoking status, etc. to make a final determination for your application.

Auto insurance

Much like life insurance, auto insurance underwriters take a snapshot of you as a driver. They take a look at the kind of car you drive, your driving history, and sometimes even your zip code to determine what kind of coverage or policy you’ll receive.

A lot of us have seen the auto insurance ads telling us how quickly you can get a quote from an insurer. This is, in part, because they’re utilizing underwriting programs to determine whether or not you’re eligible. As most states require drivers to have some form of vehicle insurance, this industry would need an incalculable amount of underwriters to sift through and approve all the applications. Thankfully, they have machine programs taking care of the bulk of applications and we can even get policies from the comfort of our couches.

Health insurance

Prior to 2014, health insurance companies utilized underwriters to look at an applicant’s medical history to determine their eligibility for coverage. Even if you received coverage, the insurance company could still apply pre-existing conditions exclusions or increased rates based on this medical history.

With the Affordable Care Act (ACA) most individual and small group markets are considered guaranteed issues. This means that you are guaranteed to be issued coverage regardless of health, income, or age, so medical underwriting is not utilized as much.

That isn’t to say it’s gone entirely. There are types of health insurance coverage that are considered “excepted benefits,” as they are not considered major medical health insurers. These include things like limited benefit plans, fixed indemnity plans, etc. These considerations vary by state and company, so it’s always important to do your research and keep up to date on what kind of coverage you’re looking for.

Banking loans underwriting

Loans are different from insurance – the company is still taking a calculated risk when investing either way. But the focus is less on you as a policyholder and more on whether or not the company can receive a return on their investment. That’s where underwriting comes in. In loan situations, an underwriter would do much of the same things that any of the above would do – they’ll look at your income, your assets, credit history, debt, and any property details you possess to have a good picture of the risk involved with your loan.

They’ll also look at the purpose of the loan itself. Is it for a restaurant? A music venue? What does the market look like for your idea? You may have a really good idea for a new gym, but if your proposed location is not attractive, that’ll be taken into account.

Conclusion

The role underwriting plays in insurance cannot be understated, though, if you’re like me (and I know I am), you’ve only recently come across this term. But it’s been around longer than any of us currently reading this piece. And it will continue to influence companies as the times change. It’s a tradition that spans centuries, so who knows what the tradition will look like in 10 or even 15 years. Only one thing is for certain – they’ll keep an eye out. It’s risky business out there.