Insurance Underwriter | Definition, What Underwriters Do

What Is an Insurance Underwriter?

Insurance underwriters are specialists that assess and analyze the risks associated with insuring individuals and assets. Insurance underwriters set prices for approved insurable risks. The phrase underwriting refers to earning compensation for the readiness to bear a potential risk. Underwriters utilize specialist algorithms and actuarial data to assess the possibility and degree of a risk.

• Investment Banking Underwriters

The underwriters of an investment bank often guarantee a specified amount of capital to a corporation during an initial public offering (IPO), an amount which is theoretically provided by investors as the source of capital. The bank acts only as the “facilitator” of the transaction, but they have still taken on an “underwriting risk” by promising to provide those proceeds of the sale to the client, regardless of the success or failure of the sale of its company’s shares.

• Insurance Underwriters

Insurance underwriters bear the risk of a contract with an individual or corporation. For example, an insurer may accept the risk of a fire in a home in exchange for a premium or a monthly payment. An underwriter’s primary responsibility is to assess an insurer’s risk before the policy period begins and at the time of renewal.

When assessing a homeowner’s policy, for example, underwriters must take into account a variety of factors. Property and casualty insurance brokers serve as field underwriters, initially checking homes or rental properties for issues such as deteriorating roofs or foundations that could represent a danger to the carrier. Agents notify the home underwriter about potential hazards. The house underwriter also examines dangers that could result in a liability claim.

Unfenced swimming pools, broken sidewalks, and dead or dying trees on the land are all potential hazards. These and other hazards pose risks to an insurance company, which may be obligated to pay liability claims in the event of unintentional drownings or slip and fall injuries.

Homeowner insurance underwriters use an algorithmic rating system to price policies based on a variety of parameters, including an applicant’s credit rating. The system calculates a suitable premium based on the platform’s interpretation and the sum of all data given by the field underwriter. When determining a premium, the lead underwriter also takes into account the applicant’s responses on the policy application.

Important: Insurance companies must strike a balance in their approach to underwriting: if they are too aggressive, higher-than-expected claims may jeopardize revenues; if they are too conservative, they will be outpriced by competitors and lose market share.

• Commercial Banking Underwriters

Commercial banking underwriters evaluate borrowers’ creditworthiness to determine if the individual or company should receive a loan or funding. The borrower is often charged a fee to cover the lender’s risk in the event that the borrower defaults on the loan.

• Medical Stop-Loss Underwriters

Medical stop-loss underwriters evaluate risk using the individual health conditions of self-insured business groups. Stop-loss insurance covers employers who pay their own health insurance claims for employees rather than paying premiums to transfer all risk to an insurance company.

Self-insured entities pay medical and prescription drug claims, as well as administration fees, from company reserves and bear the risk of big or catastrophic losses, such as organ transplants or cancer treatments. Underwriters for self-insured organizations must therefore evaluate the individual medical profiles of their employees. Underwriters also assess the risk of the group as a whole and determine an acceptable premium level and aggregate claims limit, which, if exceeded, could result in irreparable financial injury to the employer.

Fast Fact: Insurance underwriting is a significant and profitable sector; Business Insider reports that Warren Buffett used insurance and reinsurance premiums to support investments at Berkshire Hathaway.