Underwriting is the process an insurer uses to evaluate a risk and decide whether to accept it, on what terms, and at what price. The underwriter reviews the applicant's information and then accepts the risk at standard or better rates, accepts it with a higher premium or limitations, or declines it. Underwriting is the insurer's main defense against adverse selection.

Field underwriting vs. company underwriting

• Field underwriting is the producer's job: gathering complete, accurate information, getting the required signatures, having the applicant initial any corrections, and reporting what the producer knows.
• Company underwriting is the insurer's decision, made by its underwriters.

What underwriters look at

• Life and health: the application, medical exams (including paramedical exams), an Attending Physician Statement, the MIB (coded information shared among insurers, which may not be the sole basis for a decline), and inspection reports governed by the FCRA. For disability income, occupation and earned income are key.
• Property and casualty: the condition and location of property, loss history, driving records, and other hazards.

Possible outcomes

• Preferred – better than average; lower rates.
• Standard – average risk.
• Substandard (rated) – higher premium (a table rating or flat extra in life), an exclusion or impairment rider in health, or modified benefits.
• Declined – too great a risk at any price.

Limits on underwriting

Underwriters may classify by legitimate risk factors but may not unfairly discriminate between people of the same class and hazard. Federal law also limits health underwriting: GINA bars health insurers from using genetic information, and ACA-compliant major medical coverage is guaranteed issue without health rating.

A simple example

An applicant for disability income insurance has a history of back problems. Rather than declining, the underwriter issues the policy with an impairment rider excluding disabilities caused by the back condition.

Don't confuse it with…

• Underwriting happens before coverage is issued; claims adjusting happens after a loss.
• Rating (pricing) is one result of underwriting, not the whole process.
• Group underwriting evaluates the group as a whole rather than each member.

On the exam

Know the producer's field underwriting role, the sources of underwriting information (application, exams, APS, MIB, inspection reports), the risk classes (preferred, standard, substandard, declined), and that underwriting controls adverse selection.