Insurance
Underwriting
Underwriting is the process by which an insurance company evaluates risk and determines whether to accept an application for coverage and at what premium rate.
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Exam Tip
Underwriting = risk assessment. Higher risk = higher premium. ACA prohibits health underwriting.
What is Underwriting?
Underwriting is the risk assessment process insurance companies use to evaluate applicants. The underwriter reviews information to decide if they should offer coverage and at what price.
The Underwriting Process
| Step | Action |
|---|---|
| 1 | Application review |
| 2 | Medical records/exam (if required) |
| 3 | Risk classification |
| 4 | Premium calculation |
| 5 | Policy issue or decline |
Underwriting Factors
Life Insurance:
- Age and gender
- Health history
- Family medical history
- Lifestyle (smoking, hobbies)
- Occupation
- Driving record
Health Insurance:
- Under ACA, major medical cannot use underwriting to deny coverage or charge more for preexisting conditions
Risk Classifications
| Class | Description | Premium |
|---|---|---|
| Preferred Plus | Excellent health | Lowest |
| Preferred | Very good health | Low |
| Standard | Average health | Standard |
| Substandard/Rated | Health issues | Higher |
| Declined | Uninsurable | N/A |
Types of Underwriting
| Type | Description |
|---|---|
| Full (Traditional) | Complete medical exam, detailed review |
| Simplified Issue | Health questionnaire only, no exam |
| Guaranteed Issue | No health questions, automatic acceptance |
| Accelerated | Uses data/algorithms for quick decisions |
Underwriting Principles
- Insurable interest - Must have financial stake
- Utmost good faith - Both parties must be honest
- Indemnity - Insurance restores, not enriches