Underwriting Process in Insurance

Underwriting Process in InsuranceUnderwriting ProcessIn order for the restitution companies to attract profit and charge the appropriate rate for an insured, they undergo the underwriting process. Underwriting is the process in which an insurance company particularises if an applier is eligible for insurance and the rate they should charge if the applier is eligible. In simpler words, it is a process of risk classification. The purpose of insurance underwriting is to spread risk among a pool of insured in a way that is two profitable for the insurer and fair to the customer. Insurance companies need to make a profit like many other businesses. Therefore, it doesnt make sense if they sell insurance for all unity who applies for it. They may not want to charge an excessive high rate to the customer and also it is not good for them to charge the same premium to e truly policyholder. Underwriting enables the company to weed out certain appli trampts and to charge the remaining app licants premiums that atomic number 18 commensurate with their level of risk (Conrad, Clark, Goodwin, Morse Kane, 2011).The underwriting process consist of evaluating several sources of an applicant and the utilise of complex price models developed by actuaries that help the insurance companies set prices. I pass on focus on the risk classification along with some of the factors that help the underwriters classify each applicant and the use of insurance realisation leveling that allow the insurance companies to price the premiums.FactorsAn insurance company commonly looks at various factors during the underwriting process in order to evaluate a potential customer in terms of risk. These factors enable the insurer to determine whether or not the potential customer is insurable. If the potential customer is determined to be insurable, then these factors will help to place them in the appropriate risk group. nearly of the factors considered be age, sex, health write up, curr ent health/physical condition, personal family health history, occupation, personal habits/character, financial condition, and hobbies (Clark, et al, 2011).Some people believe that any characteristic everyplace which we have no control, such as gender, race, and age, should be excluded from insurance underwriting and rating practices (Baranoff, Brockett, Kahane, 2009, p.157). This argument reflect the idea that the factors utilize by insurance companies should be base on the behavior of the people instead of the quality on which they are born.Risk ClassificationRisk classification plays an important role in the pricing of the policy. The premium that the customer pays will depend on the category he/she belongs to. Underwriters classify the applicants into four types of risk groups standard risk, substandard risk, preferred risk and uninsured/declined risk.Standard risk. Individuals who have a likelihood of loss or the probability of filing a claim that is not significantly grea ter than the average are classified as standard risks. Based on the underwriting standards of the insurance company, the people in this group are given a term of insurance without world charged for any extra fees or be subjected to any policy restrictions and they are charged with the standard premium rate (Clark, et al, 2011). Most individual lifetime and health insurance policies are issued at standard premium rates.Substandard risk. Insured that are classified as substandard risk or rated risk, are those that have a greater chance of filing a claim. Applicants are classified in this group because of their health and/or other factors that makes them more seeming to die earlier than those who dont possess these kinds of risk factors (Clark, et al, 2011). They are usually charged a higher than standard rate because of the added risks that they possess. Examples of people that may be in this category are those who possess a history of high blood pressure, diabetes, drugs and alcoh ol. Or maybe they engage in some dangerous activities like skydive or rock climbing.Preferred risk. Applicants classified as preferred risks are those who are expected to have an above average life expectancy (Clark, et al, 2011). plurality in this group are preferred by the insurance companies because of their health history and good habits. They are usually offered a lower rate or preferred rate. Applicants that may belong to this group are nonsmokers or people that have a good health history.Uninsurable risk. Individuals categorized as uninsured or declined risk are those that pose a risk that is too great for the insurance company to cover. The applicants conditions are so rare or alone(predicate) that the company may not be able to arrive at a suitable premium (Clark, et al, 2011), so their policies are generally declined. Examples of this category take people who have a serious illness and people who conduct illegal activities.Insurance Credit Scoring in PricingAfter clas sifying the applicants into one of the risk groups, the insurance company needs to set price for the policies. One of the tools used by the insurance companies for pricing is the credit slews that help them determine the adequate premium for each consumer.Insurance scores are confidential rankings based on credit history development. Insurance scores are used to provide insurers with a snapshot to provide service to consumers. The score is derived from the consumers previous credit history. This data allows the insurers to price insurance premiums/rates more accurately. (Almarshary, Erbek Reddic)Insurance scores estimate the probability of having insured file a claim. The variables commonly used to estimate insurance scores include measures of performance on credit obligations, credit-seeking behavior, use of credit, length of credit history, and types of credit used (Powell, 2009). They do not include race, color, religion, national origin, gender, marital status, sexual orienta tion, age, address, salary, disability, occupation, title, employer, date employed or employment history for score purposes (Anonymous, 2009).Insurers have found a strong correlation between insurance claims and credit scores. People with low scores are more belike to file claims than people with high scores (Lankford, 2007). They also discovered that people who made late payments tended to have more claims (Almarshary, et al). Improving credit score can certainly make a big difference in the premiums. More insurers now are considering credit scores when setting premium rates.Credit scoring enables insurers to better assess the risk of future claims. In fact, insurance credit scoring helps insurers to differentiate between higher and lower insurance risk (Almarshary, et al). Therefore, insurers will charge a premium based on the information provided by the credit score.When insurers use insurance scores to improve the accuracy of predicted losses, it benefits individuals and socie ty (Powell, 2009). Premiums are closely related to consumers risk of loss on average, so insurance scores increase the fairness in insurance pricing outcomes. Insurance scoring also adds value to insurance transactions. Because insurance scores are accurate and inexpensive rating variables it reduces the overall exist of providing insurance and this reduction in cost is applied to the premiums of the customer (Powell, 2009).Many people may not be familiar with the underwriting process, but knowing the factors that affect the decision of the insurers of placing you into one of the risk groups, is very useful. In this way, you can easily know if you can be chosen as a potential customer based on your personal information and even if you are not chosen as a potential customer, you might at least know what to avoid in order to precipitate the chance of your policy being rejected. Finally, we have to notice the importance of the credit scores, because many insurance companies used it n owadays to price the premiums. Having a good credit history is a key factor to get a lower premium rate in the policy.