If you are in the market to buy a life insurance policy, you will notice a common term in the insurance world ’underwriting’.
Before providing you coverage, an insurance company needs to determine how much of a gamble it’s taking and the chances that something might go wrong. This process is called underwriting.
Underwriting is how insurance companies in Canada assess the risk and profitability level of offering you a life insurance policy.
If you wonder ‘what is underwriting in insurance’, this article is the perfect fit. This article will guide you into what is underwriting in insurance, answer any questions you might have, and walk you through the whole underwriting process.
What is Underwriting in Insurance, and How Does It Work?
Underwriting is the process by which insurance companies decide whether to issue a policy and, if so, what the terms of that policy will be. It is essential because it is through the underwriting process that insurance companies assess the risk of insuring a particular person.
The process includes reviewing an applicant’s medical history, lifestyle, and other risk factors to determine if the company should offer a policy to the applicant, at what conditions, and at what price. The factors they consider include the applicant’s age, health, and lifestyle.
The underwriter is the person who decides if you will get coverage, what kind of exclusions and ratings there are on your policy, as well as determining how much it costs for a premium.
The insurance underwriting process usually begins with an application from the prospective insured. The insurer will then review the application and may request additional information, such as medical records, or even request additional medical examinations.
Once all of the relevant information has been gathered, the insurer will decide on whether to issue a policy and, if so, what the terms of that policy will be.
Factors That Insurance Companies Consider When Underwriting a Policy
Insurance companies like Manulife use the underwriting process to figure out how likely it is that something terrible will happen. All insurance policies involve underwriting to determine your personal background and any risks that the insurance you are buying will incur.
Underwriters usually look at the following factors:
- Age: Insurance companies usually charge lower premiums if you apply at a younger age. You would get lesser coverage if you are older and have fewer financial obligations.
- Coverage amount: Insurance companies always do more underwriting when you ask for a higher death benefit. Underwriters might use your financial details to ensure you are not requesting more coverage than you need.
- Existing coverage: Suppose you already have an existing life insurance policy. In that case, the underwriter will have to ensure that you are not applying for more than enough insurance.
- Citizenship status: Some underwriters and insurance companies only offer policies to specific provinces. You won’t qualify for their products if you are not within their jurisdiction.
- Gender: Females get lower life insurance premiums because they live about 6-8 years longer than men. Other medical risks can also raise the premiums for any gender.
- Foreign travels: Some countries fall into the uninsurable category because of safety issues, government stability, and medical care availability.
- Health history: The healthier you are, the lower your premium rates will be.
- Insurable interest: If you are buying an insurance policy on someone else, you need to be able to prove that you would suffer financially if they pass away.
- Hobbies: The hobbies you enjoy can affect your rates, especially if you are into hobbies like skydiving and scuba diving.
- Occupation: Some jobs have more mortality rates than others. These kinds of jobs usually have higher premiums.
What is the Process of Underwriting?
Every insurance company in Canada uses its underwriting process to determine your final premiums. While the process varies across insurers in Canada, these steps are followed by most underwriters.
Step 1: Apply
When you apply for life insurance, your completed application goes to the company’s underwriters, who will use it as a basis of consideration when determining whether or not they want to issue coverage.
Step 2: Assessment
You are asked to provide evidence of insurability by answering questions and undergoing various medical tests. The underwriter reviews your application using a comprehensive manual that includes guidelines for assessing risk factors such as medical history, driving record, substance abuse history, and extracurricular activities.
For example, a heavy drinker could be considered high risk compared to an individual without any known issues with drinking. Further, someone who participates in dangerous sports such as surfing, diving, and paragliding is deemed high risk.
To make sure you’re getting the coverage that is right for your needs and budget, underwriters will use a variety of different tools. These include:
- MIB check: The Medical Information Bureau is a trade group that assists underwriters with information about your past medical records from previous life insurance applications to avoid fraud. The MIB shows information about any medical impairments, treatments, and diagnoses reported by other underwriters.
- Application quality check: Underwriters usually go through your life insurance application, maybe through a phone interview. The phone call may take 15-30 minutes and covers all your medical history, hobbies, and finances to ensure the information you submitted is correct.
- Health vitals check and Medical exam: During the underwriting process, a medical technician will perform an exam on you to gather information about your health status and perform a vitals check. You will be required to take basic measurements like height, weight, and blood pressure, asked to take a blood test to identify potential risky health concerns and a urine test for drug analysis.
- Attending physician check: When your medical exam results are out, they will be sent to the underwriters. If there are concerns, the underwriter will order an Attending Physician Statement (APS). The APS will give your underwriter the summary of your health status from a doctor’s perspective.
- Prescription check: As with the MIB check, medical exam, and APS request, the underwriter will check all your prescribed medications over the last 3-5 years. The prescription check will confirm the information in your insurance application.
- Motor vehicle report: A MVR details your driving history and notes traffic citations, accident reports, vehicular crimes, and DUI convictions from as far back as seven years.
- Actuarial tables: Underwriters often use actuarial tables to estimate how long you will live and what risks you pose to the insurance company. The actuarial table is a statistical analysis of your life expectancy, and where you fall on the actuarial table varies. Your position will depend on your health status, smoking status, occupation, family history, and medical diagnosis.
Step 3: Decision
The underwriting process will tell you if you are approved for life insurance and how much coverage you can get. The process will also tell you what the monthly premiums will be.
You can decide if you want to buy the insurance at the price and terms provided.
How Long Does Underwriting Take?
The underwriting process can take anywhere from a few days to a few weeks.
Underwriting is one of the most critical steps in getting a new insurance policy. An insurer will use this process to assess the risk of insuring a potential customer and determine the premium the policy should charge.
The time it takes to complete the underwriting process can vary depending on the type of policy and the company involved, but it typically takes several weeks.
During this time, the insurer will collect information about the applicant’s medical history, driving record, and financial situation. The insurer will also order a medical exam if necessary. Once all the information has been collected, the underwriting process will be complete, and the insurer will notify the applicant of the decision.
What are the Benefits of Having a Good Underwriter?”
One of the benefits of having a good underwriter is that they can help you to find the best insurance policy for your needs. The role of an insurance underwriter is to assess your risk and find a policy that offers the best coverage at the best price. They can also help you understand the terms of your policy and ensure you are getting the most for your money.
Final Thoughts on What is Underwriting in Insurance
The underwriting process might seem complex, but if you share enough information with your underwriter, the process won’t involve much work.
Your insurance advisor can guide you to ensure a smooth and straightforward experience.
However, a no-exam policy will be perfect if you need a policy that would not stress you with the underwriting process. These are sometimes called ‘guaranteed issue policies’.
If you are not in good health, you could be better off with this choice.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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