5.1 Purpose of Underwriting
Underwriting is the process by which an insurer determines whether, and on what basis, an insurance application will be accepted. Underwriting is the method used to calculate the level of risk that is involved and to determine under what rates the contract can be issued. Since underwriting is a process of selection, classification and rating of risks, underwriters are naturally concerned with some very basic factors.
- Is the proposed insured insurable?
- Does insurable interest exist?*
- If the applicant and insured are two different people, does an insurable interest exist between the two of them?
- Is the proposed insured a standard risk?
Once insurable interest has been established, the process of evaluating the collected information and applying it against the insurer's standards and guidelines begins. Once that process is accomplished, premium rates can be established.
The underwriter could be the company receiving premiums and accepting responsibility for fulfilling the policy contract, the company employee who decides whether or not the company should assume a particular risk, or the agent who sells the policy. Agents are sometimes referred to as field underwriters and are responsible for initiating the process (i.e., solicitation, application, etc.).
*We've already learned what "insurable interest" means, but just remember that insurable interest need exist only at the time the life insurance policy is purchased, not necessarily at the time of benefit payout.
