What are the Principles of Underwriting in Insurance?

An insurance underwriter has the critical task of ensuring that an insurance company is profitable, and continues to operate in a stable and profitable manner. Insurance underwriting is a highly complex task that does a lot of processing and number crunching. Further, underwriting is an extremely important aspect of insurance that impacts the bottom line of an insurance company.

In order to understand the principles of underwriting in insurance, first we need to understand the concept of underwriting in insurance. Underwriting basically refers to the activity of evaluating the risk profile of an asset or individual. This process is carried out by insurance underwriters. Once the underwriters assess the risk profile of an asset, they decide on the amount of premium that the insurance company can charge for extending insurance coverage to the said asset. Higher the risk, higher the insurance premium charged.

Now, let us talk about the most important principles of insurance underwriting:

Principles of Insurance Underwriting

1.) Minimization of Loss

The insurance underwriter must have the best interest of the insurance company in mind before initiating an underwriting activity. He or she must strive to minimize the loss factor of an insurance company while conducting his assessment. Along with loss minimization, the underwriter should also keep an eye on the profitability factor of underwriting an insurance policy.

2.) Known Hazards

There is implied risk when an insurance company issues an insurance policy. These risks are generally called known hazards. There are a number of known hazards that are associated with a particular client profile. The insurance underwriter must be cognizant of these known hazards while conducting the underwriting process.

3.) Information

An insurance underwriter must gather as much high quality information with respect to client profile, area of insurance, moral hazards, implicit and explicit risks, and beyond. Generally, an abundance of high quality data will lead to better risk profiling, which will lead to higher quality decision making, which would finally lead to more profits for the insurance company.

4.) Growth of Business

Underwriters should also keep an eye on business expansion, and calculated risk taking. An underwriter should not be so rigid in his approach that he misses opportunities of growth. One eye should be on effective risk profiling and the other eye should be on dynamism and business growth opportunities. It is a fine balancing act.

5.) Solvency

It is absolutely imperative that an insurance company will only underwrite insurance contracts that it can service. At no point should the financial stability of a business be compromised on. Generally, this issue should not arises as there are regulators above insurance companies that exercise strict regulation.