People buy insurance policies to protect themselves against financial loss resulting from injuries, illnesses, or lost or damaged property; policyholders transfer this risk of loss from themselves to their insurance companies. As a result, insurance companies assume billions of dollars in risks each year. Underwriters evaluate the degree of risk posed by each policy application to determine whether the insurance company should issue a policy.
Underwriters base their decisions on a number of factors, including the applicant's health, occupation, and income. They review and analyze information in insurance applications, medical reports, actuarial studies, and reports from loss control specialists. If an applicant appears to be at a greater risk level than normal, the underwriter may decide that an extra premium is needed. Underwriters must exercise sound judgment when deciding whether to accept an applicant and in deciding on the premium; their decisions are crucial to the financial success of the insurance company.
To calculate risks, underwriters use automated underwriting systems, also known as smart systems. The underwriters create the software rules to screen insurance applicants for specific criteria, such as income and credit scores if the application is for a mortgage, or age and medical history if it is a life insurance application. The software summarizes the applicants' qualifications, enabling underwriters to make decisions more quickly and accurately regarding insurance approvals.
Insurance underwriting is a very competitive business. If the underwriter evaluates risks too conservatively and quotes prices that are too high, the insurance company may lose business to competitors. If the underwriters evaluate risks too liberally and accept applications at inadequate prices, the company will have to pay more claims and will ultimately lose money. It is essential that underwriters evaluate applications very carefully.
Many underwriters specialize in life, property, or health insurance; many further specialize in individual or group policies. Property or casualty underwriters may specialize by the type of risk involved, such as fire or automobile. Some underwriters work exclusively with business insurance. These commercial account underwriters must often evaluate the firm's entire business operation.
Group contracts are becoming increasingly popular. In a group policy, life or health insurance protection is given to all persons in a certain group at uniform rates. Group contracts may also be given to specified groups as individual policies reflecting individual needs. A labor union, for example, may be given individual casualty policies covering automobiles.
Underwriters must assess the acceptability of risk from a variety of policy applications. They must be able to review and analyze complex technical information.
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