What Is Insurance Underwriting?

Insurers use underwriters to evaluate the risks you pose and determine how much you’ll pay for coverage, aka, your policy premium, given those risks.

Written by Lindsey Danis / May 31, 2022

Quick Bites

  • Underwriters assess your application for an insurance policy to determine whether or not to provide you with insurance depending on how much risk you’ll present to the company.
  • The more risk you present, the higher your premium goes.
  • Effectively, underwriting manages the insurer’s risk—they need to know the chances you’ll be claiming on a policy and charge you accordingly.
  • Underwriters review different variables depending on the type of insurance you’re applying for, such as home, auto or life insurance.

Fender benders. Speeding tickets. The odd parking-lot ding. They all leave a mark on your car and your driving record. It's those marks, along with some other more indelible factors like age and gender, that auto insurance companies use to determine how much you pay for coverage, with the help of an underwriter.

Underwriters work with all kinds of insurance, and companies rely on them to evaluate your application (and history), the risks you might present and how to price that risk—which becomes the cost of your monthly or annual payments.

The process helps standardize the insurance market, so two similarly qualified applicants would pay roughly the same amount for coverage. When you understand how underwriting works, you’ll have a better idea of the application process and how to get a desirable rate or policy.

Inside this article

  1. How does underwriting work?
  2. How do they determine risk?
  3. How can you get what you want?

How does insurance underwriting work?

If you’re in the market for an insurance policy of any kind, you’ll be expected to provide all sorts of information.

Insurance companies take that information and use underwriters who analyze it and the risk the company would take by providing you with a plan. The result is what they determine is the right price for the insurance company to take on the risk of insuring you.

Most life insurance companies will have you take a medical exam, and they’ll also look at other information such as prescription medication history from third-party databases, Fidelity Life explains.[1] You’ll then get a classification that reflects your level of risk: the healthier you are, the less risk you present to the company, the cheaper your premium.

Underwriting used to be a lengthy process. These days, insurance companies rely on predictive analytics in the application process to speed things up. According to Fidelity Life, in some cases you can be approved the day you apply!

How do underwriters determine risk?

Life

For life insurance, an underwriter might look at:

  • Age

  • Gender

  • Health/smoking history

  • Occupation

  • Hobbies

Age

The older you get, the higher your premium goes.

Let’s say you’re a 33-year-old female living in Boca Raton, Florida, and you want a life insurance policy for $1 million for 25 years. The cost, if you’re in great health, would be $39 a month. Add 10 years, and the cost rises to $78 a month.[2]

Gender

Women outlive men, and that means the latter pay higher premiums than the former. Taking our previous example and turning it into a male brings the monthly cost up to $47. Not a huge difference, but a bump nonetheless.[3]

Health/smoking history

Smokers pay more due to the known health effects of smoking.

OK, so what if you were once a smoker and quit about four months ago. How might that impact your rate?

Lisamarie Monaco-Ray, managing director at PinnacleQuote, an independent life insurance agent, says carriers look back, so you might still be considered a smoker and get a smoker’s rate. The look-back period varies by insurer, but she says it can take more than 12 consecutive months of being smoke-free to get a nonsmoker’s rate.

You will likely have to undergo a medical exam as part of your application for a policy. In some cases, you may be denied a policy if the insurer judges that your health situation is too grave for them to take a risk.

There are, however, no-exam policies for higher-risk cases that might be worth checking out, though the rate may well be significantly greater.

Occupation

If you work on a construction site mixing concrete or in a restaurant kitchen playing with knives, your job poses a greater danger than if you work in an office environment (although being sedentary comes with its own dangers, but we’ll leave that risk for another time). This will also have an impact on your premium.

Hobbies

Let’s go back to our 25-year-old female nonsmoker. As she lives in Florida, she takes the opportunity to do what she loves and scuba dives on a weekly basis. That hobby presents a far greater risk than if she preferred, say, knitting hats for cats.

Is Life Insurance Worth It?

Is Life Insurance Worth It?

Learn how life insurance works, how much it costs and whether you should get it.

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Auto

For auto insurance, underwriters check factors including your driving record, age, gender, vehicle make and model—since pricier cars cost more to insure—and your car’s safety features, which can get you a discount.

They also check personal data, including marital status and employment. Claims data shows that certain types of people have fewer claims than others. Unmarried people have more claims than married people. Job hoppers have more claims than people who stay with the same company for a long time.[4] These factors could impact your rate.

Gender accounts for a slight difference in auto insurance rates. The Zebra reports that male drivers under age 20 pay 14% more than their female peers. After age 20, that reverses and female drivers pay about 1% more than male drivers. Go figure.

As of 2022, six states do not consider gender in their auto insurance premiums.[5]

How can you get the rate or policy you want?

Negotiation isn’t an option, says Monaco-Ray. If you can’t pay the premium, she recommends lowering coverage until it becomes affordable.

Let’s say you are a relatively healthy 44-year-old woman living in Florida with no smoking history for the past five years. For a 10-year life insurance plan of $1 million, your estimated rate is $45. Knock that down to $500,000, and your premium drops to $26.10 a month, which might be more palatable for your budget.

With auto insurance, you can lower coverage to your state’s limits. Some items can be omitted altogether, for example, if your car’s more than a decade old (time for a new one?), skip the collision coverage. It’s simply not worth it on a vehicle that old.

For auto insurance, a good credit score often correlates to lower premiums because people with good credit tend to have fewer claims, Car and Driver reports.[6]

Alternatively, you can choose a higher deductible to lower premium costs, though that will mean you will have to pay more out of pocket if and when you file a claim.

Take advantage of those factors you can control, like improving your credit score or buying a car with safety features, to get lower rates. If you’re still not happy with the offer, you always have the option to shop around.

Article Sources
  1. “How Life Insurance Underwriting Works,” Fidelity Life, https://fidelitylife.com/learn-and-plan/insights/how-life-insurance-underwriting-works.
  2. “Average Life Insurance Rates by Age, Gender, Policy Type and Coverage Amount,” PolicyGenius, https://www.policygenius.com/life-insurance/life-insurance-rates.
  3. “Life Insurance Rates by Gender,” PolicyGenius, https://www.policygenius.com/life-insurance/life-insurance-rates-by-gender.
  4. “Underwriting and Rating,” Alabama Department of Insurance, https://www.aldoi.gov/consumers/AutoUnderwriting.aspx.
  5. “Male vs. Female Auto Insurance Rates,” The Zebra, https://www.thezebra.com/auto-insurance/driver/other-factors/male-vs-female-car-insurance-rates.
  6. “Can You Negotiate Car Insurance: Everything You Need to Know,” Car and Driver, https://www.caranddriver.com/car-insurance/a36147483/can-you-negotiate-car-insurance.

About the Author

Lindsey Danis

Lindsey Danis

Lindsey Danis is a writer covering food, travel and personal finance. She's written about personal finance for Business Insider, NextAdvisor, The Penny Hoarder, and elsewhere.

Full bio

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