Underwriting

Underwriting is how insurance companies price risk, aka how they figure out how much coverage a potential policyholder needs vs. the likelihood they’ll claim. They then use this info to set a monthly premium.

What’s an underwriter?

In insurance, an underwriter evaluates and decides how much coverage a policyholder should receive, while evaluating risk (how likely they are to make a claim) and determining whether to insure the policyholder.

They then use this info to determine how much a policyholder should pay for a given renters or home insurance policy.

These considerations and calculations are called underwriting.

The underwriting process in home and renters insurance

Insurance underwriters review applications for insurance coverage, and then either accept or reject a potential policyholder based on their risk analysis.

By assessing how much coverage a policyholder is looking to get, versus the level of risk associated with that person, insurance underwriters review the coverage request and decide whether or not to offer an insurance policy.

Insurance underwriters also review existing policyholders for risk analysis, advise on risk management situations (e.g. should they renew a policy if someone suddenly presents a significant risk), and determine coverage amounts on a case-by-case basis.

Things that affect your risk score

There are a variety of factors that underwriters take into account when analyzing a potential policyholder.

Here are a few things that could negatively affect the underwriting process (and your monthly premium), but are easy to address:

• A poorly maintained roof
• Old construction you haven’t taken steps to update
• Outdated wiring or plumbing
• A lack of home safety measures (no deadbolt, sprinklers, fire detector, etc.)

If you do take the proper steps to update the above, underwriters will normally reconsider a given risk or set of risks once the new info is presented to them.

Read: If you install a burglar alarm or other home security systems, update your insurance company, and you may just be able to snag a better monthly premium.

The historical roots of the insurance underwriter

The term ‘underwriter’ goes back to the 17th century in London. The city was a trade center globally, leading to increased demand for ship and cargo insurance.

Edward Lloyd’s coffee house became the prime place to get this insurance. Each party would assume the risk of a sea voyage, and write their name under the amount of risk they were willing to assume. This ‘underwriting’ gave way to the Lloyd’s of London we know today.

But from the 18th to the 20th century, things didn’t really change too much in the world of underwriting. A group of people sat around looking at files upon files of data, gathered from as many sources as they could get, manually crunched the numbers, and decided if a given applicant was a “good risk.”

Today, however – with the advent of the internet, automation, and the increasingly exponential power of computing – we’re looking at a very different reality.