What is underwriting?

If you’re in the market for an insurance policy – life insurance or otherwise – you’ve likely come across the concept of underwriting. Insurance professionals throw around the term a lot—an article mentions underwriting risk, or your broker references an underwriter. These professionals may assume everyone understands what underwriting is, but that’s not always the case.

This article explains the concepts behind underwriting, inside and outside of insurance. We further detail how life insurance policies are underwritten, including the factors considered, and what the underwriting process entails.

How does underwriting work?

Underwriter is an important role at institutions and companies that deal with financial risk. Insurance is the transfer of risk from an individual to a company. It is the underwriter’s job to determine if its financially viable to take this risk on.

Underwriting isn’t only applicable to insurance. It references any time an individual or organization takes a monetary risk in exchange for a payment. You might have heard the term in reference to investment bankers and stocks. Investment banks underwrite initial public offerings by guaranteeing the offering company that their equity will sell at a specific price.

Commercial banks also underwrite the risks of lending money to people and businesses, whether for a new home or equipment. During this procedure, the bank looks at a person or businesses’ credit score, financials, and more to determine how risky granting a loan to that person or business is.

Insurance underwriting follows a similar path. The underwriting process and the role of an underwriter determine the risk of a particular event happening, such as damage to your vehicle or your death. This allows the insurer to price premiums correctly or deny your coverage altogether.

The insurance underwriting process varies depending on the type of insurance you’re purchasing. Factors, timelines, and procedures also vary between insurers. For example, a home insurance policy usually considers how old your property is, where it’s located, what you’re using the building for, how close it is to a fire hydrant, and more. In contrast, a car insurance policy involves your prior driving record, your car’s year and model, its safety features, your age and driving history, and so forth.

How life insurance policies are underwritten

A life insurer’s risk is that you may die within your policy’s active years, and they’ll have to pay out your death benefit. As a result, the life insurance underwriter calculates your likelihood of death using a cocktail of factors, software programs, and actuarial tables.

Factors that life insurers consider when underwriting

Every insurance company has a different underwriting formula. That’s why your premium from insurer to insurer may vary and why some may deny coverage while others don’t. Generally, life insurers consider the following:

Age

As we get older, we face new ailments that increase our likelihood of death. That’s why younger people usually have lower life insurance premiums. In some cases, you may see a decline in your life insurance costs as you get older because older can also mean more time away from your last cigarette or dangerous hobby. Accidental deaths are the main contributor to deaths in younger age groups, and thus underwriters look for other signs of risk as you’ll read below.

Overall health

Overall health can include existing medical conditions, your body mass index (BMI), family health history, and more. More commonly, insurers are considering mental health. But how mental health factors into your coverage remains complicated.

Gender

Women, on average, live six to eight years longer than men (source: World Health Organization). So, women generally see lower rates for life insurance. However, the rates for disability insurance trend higher for women as they have a higher rate of disability.

Occupation

Jobs such as police officers, firefighters, construction workers, oil drillers, and loggers are among a long list of those who face more risks than others resulting in higher premiums. However, with increasing studies (National Library of Medicine) linking stress to higher mortality rates, having a high-stress office job may also affect your coverage.

Foreign travel

Frequent travelling or upcoming trips to dangerous countries can lead insurers to suspect a higher risk of death.

Previous ratings

If you previously applied for life insurance and received a life insurance rating, your current application may consider this initial rating.

Hobbies

Dangerous hobbies can mean higher insurance rates. Activities such as bungee jumping, paragliding, or skydiving may not be the best idea.

Alcohol and drug use

Regular binge drinking, a history of drug or alcohol abuse, or a lousy nicotine habit can put you at a higher risk of death. Naturally, it also means a higher premium. Although light marijuana use will not affect your premium, an insurer may treat regular marijuana consumption similar to regular tobacco use.

Driving history

In 2018, Canada saw over 1,900 deaths as a result of motor vehicle accidents (source: government statistics). A poor driving record can, therefore, indicate a higher risk to the insurer.

Does no-medical life insurance go through underwriting?

Some insurers offer policies that skip the medical examination part of underwriting, but that does not mean they skip the underwriting process. Because a lack of medical examination means less information to determine their risks, it generally results in a higher premium. The underwriting process of these policies is through a medical questionnaire an applicant would answer with their insurance advisor.

The benefit of a no-medical life insurance policy is that it’s a simplified procedure. Without the need for physical examinations and having the underwriter examine those results, the insurer can approve your policy within a few days (or instantly!) instead of weeks.

Those with particular health struggles may also prefer a no-medical life insurance option. Instead of health tests, you would just answer the medical questionnaire with your life insurance advisor. With that in mind, if you’re generally in good health, going with a medical option usually leads to a cheaper insurance premium.

How does the life insurance underwriting process work?

Like the factors considered, the underwriting process for life insurance differs between insurers, but you can generally expect the following steps:

Application

You and your insurance advisor complete an application that outlines general information about your health and lifestyle. It will provide the insurer with the information to consider the prior mentioned factors.

Medical examination

Depending on your policy or your application, the insurer may require a medical examination. This can include:

• A statement from your physician— i.e., a summary of your medical history to verify your questionnaire (this is also known as an Attending Physician Statement)
• A check of your previous records with the Medical Information Bureau
• A paramedical exam that checks your height, weight, blood pressure, and other vitals
• An interview to further understand your medical history and lifestyle
• A blood and/or urine test to provide additional insights into your health

An insurer may also ask for a motor vehicle report or financial inspection report to better understand your non-medical risks.

Occasionally, an insurance company may request additional medical tests based on the assessed risk gathered from the information above. Due to COVID-19 protocols, many insurance providers are relying on tele-health interviews to determine one’s health history.

The underwriter’s role

Your application is sent to and verified by an underwriter who assesses your risks. Based on a guide unique to each insurer, the underwriter compares your risk factors to the insurer’s guidelines to determine whether you’re an appropriate risk for the company.

This is also the stage where underwriters use software and actuarial tables to determine your premium.

Final thoughts

Underwriting is ultimately how an insurer determines how risky you are as a policyholder. The factors they consider and how they go about underwriting vary between what insurance you’re purchasing and who you’re purchasing from.

To learn more, speak with one of our experienced advisors. They can help you through the underwriting process – including filling out any questionnaires – and further explain what options may be best for you.