Editing Underwriting (section)

==Insurance underwriting==
[[Insurance]] underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, and whether to accept the risk. Underwriting involves measuring risk exposure and determining the [[insurance premium|premium]] that needs to be charged to insure that risk. The function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue [[Insurance contract|insurance policies]] at a premium that is commensurate with the exposure presented by a risk.

Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. For example, in underwriting automobile coverage, an individual's driving record is critical. However, the type of automobile is actually far more critical.{{Citation needed|date=February 2023}} As part of the underwriting process for [[life insurance|life]] or [[health insurance]], [[medical underwriting]] may be used to examine the applicant's health status (other factors may be considered as well, such as occupation and risky pursuits) and decide whether the policy can be issued on the standard terms applicable to the customer's age. The factors that insurers use to classify risks are generally objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.<ref>[http://www.actuarialstandardsboard.org/pdf/asops/asop012_101.pdf "Risk Classification (for All Practice Areas),"] Actuarial Standard of '''Practice No. 12''', Actuarial Standards Board, December 2005</ref>

Underwriters may choose to decline a risk, provide a quotation with adjusted premiums, or apply policy exclusions. Adjusted premiums typically include a loading factor,<ref>{{cite journal |last1=Wang |first1=Shaun |title=Insurance pricing and increased limits ratemaking by proportional hazards transforms |journal=Insurance: Mathematics and Economics |date=August 1995 |volume=17 |issue=1 |pages=43–54 |doi=10.1016/0167-6687(95)00010-P}}</ref> which accounts for administrative costs, expected claims, and a margin for profit.<ref>{{cite journal |last1=Winter |first1=Ralph A. |title=On the Rate Structure of the American Life Insurance Market |journal=The Journal of Finance |date=March 1981 |volume=36 |issue=1 |pages=81–96 |doi=10.1111/j.1540-6261.1981.tb03536.x}}</ref> Policy exclusions, on the other hand, limit the circumstances under which claims can be made. Depending on the type of insurance product (line of business), insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance. Some insurance companies, however, rely on agents to underwrite for them. This arrangement allows an insurer to operate in a market closer to its clients without having to establish a physical presence.

Two major categories of exclusion in insurance underwriting are [[moral hazard]] and [[correlated]] losses.<ref name="npr">{{cite news|url=https://www.npr.org/blogs/money/2014/10/03/353030214/bedbugs-lava-and-bowling-balls-inside-my-homeowners-insurance-policy|title=Bedbugs, Lava And Bowling Balls: Inside My Homeowners Insurance Policy|newspaper=NPR.org}}</ref> With a moral hazard, the consequences of the customer's actions are insured, making the customer more likely to take costly actions. For example, bedbugs are typically excluded from homeowners' insurance to avoid paying for the consequence of recklessly bringing in a used mattress.<ref name="npr" /> Insured events are generally those outside the control of the customer, for example in life insurance, death by automobile accident is typically covered, but death by suicide is typically not covered. {{Citation needed|date=March 2021}} Correlated losses are those that can affect a large number of customers at the same time, thus potentially bankrupting the insurance company. This is why typical homeowner's policies cover damage from fire or falling trees (usually affecting an individual house), but not floods or earthquakes (which affect many houses at the same time).<ref name="npr" />

For all types of insurance underwriting, advice and assistance is often provided by [[reinsurer]]s, who of course have an interest in accepting risks on appropriate terms.<ref>{{Cite web |title=Underwriting: The Role of Underwriting in the Reinsurance Industry |url=https://fastercapital.com/content/Underwriting--The-Role-of-Underwriting-in-the-Reinsurance-Industry.html |access-date=2024-03-26 |website=FasterCapital |language=en}}</ref>
See {{slink|Financial risk management#Insurance}}.