5 common questions about underwriting (2024)

Underwriting sounds mysterious, even a little secretive. It’s one of those insurance words that a lot of people have heard of, but hardly anybody understands. Well, it’s true that underwriting takes place behind the scenes. But it isn’t secret or even that mysterious. It is, however, a key part of the insurance approval process and something worth knowing about, because the kinds of things an underwriter looks at can determine whether the company issues an insurance policy to a prospective customer how much that policy costs.

1. What is underwriting?

Underwriting is the process used to determine whether someone is eligible to receive a financial product like insurance. It involves gathering information about the health characteristics and risks of the person applying for coverage in order to help decide whether to accept or decline the application. The information gathered also helps determine the price (or premium) the company charges if it accepts the individual’s application.

The amount of information gathered during underwriting can vary according to the company and both the kind and amount of insurance being applied for. Sometimes it involves asking basic questions about health or other relevant information (for example, driving record in the case of auto insurance). Other times, the underwriter will request a detailed health history, some basic medical tests and/or a physical exam. Generally speaking, the underwriting process is more involved if the policy being applied for is for a large amount of money. In some cases, it’s also required to get an insurance company’s lowest rates.

2. Is underwriting always required—and, if so, why?

Insurance companies rely on underwriting for every policy they issue—it’s not matter of singling anyone out. They do it to help them decide whether offering insurance to a potential customer is a good business decision. If a company accepted every person without evaluating the risk, it wouldn’t stay in business very long. So, although it’s true that not everyone is accepted for coverage, those who do get coverage can be more confident that the insurance company is financially sound, and that it will pay the full benefit if and when there’s a claim.

Underwriting can actually work to a customer’s advantage. If underwriters discover an applicant is in good health, does not practice unhealthy habits, and has other positive characteristics, they can often offer a better-than-average rate. Without underwriting, the company would probably have to charge more to all its customers to cover payouts for those who are higher risks.

3. Does an applicant have to answer all the questions and meet all the other underwriting requirements?

The short answer is “yes.” If an individual refuses to answer questions or fails to meet the other requirements laid out by the insurance company, that person’s application will be rejected. But keep in mind that some types of policies require fewer answers and fewer or no medical tests.

4. Where does the information used in underwriting come from?

The initial information comes from the answers the individual gives while filling out the application. The underwriter takes that information and uses it to draw additional information from a variety of sources such as motor vehicle department reports or MIB, Inc., a not-for-profit group that provides insurance companies with information. The insurance company receives this information with the understanding that it is to remain confidential.

In many cases, the information provided during the application process and follow-up is enough for the underwriter to make a decision. But there are cases where underwriters call the person applying to request additional information or ask questions about the information already provided. Consider this a good thing: Rather than rejecting the application outright, the underwriter is looking for information that might help convince the company to issue the insurance policy.

5. What does underwriting mean to me? Why should I care?

Whether or not an applicant ever hears from an underwriter, the underwriter’s work is key to deciding if a customer is approved for coverage and how much he or she will pay. People who are planning to purchase insurance should keep in mind that there are sometimes things they can do to help improve their chances of getting “good marks” from the underwriter, such as eating healthy, getting exercise, and quitting smoking. Those changes can bring better overall health and a better deal when it comes to insurance.