Insurance underwriting: Buying insurance is significant as it helps in tough times like medical emergencies, accidents, etc. Insurance is basically a contract between two parties wherein the insurance company agrees to pay compensation for the loss incurred to the individual based on the term and conditions of the insurance contract in exchange for premiums paid by the individual. 

These contracts usually involve risks of higher value where insurance companies have to pay a higher amount than the premiums paid by the person whose life is insured. A term life insurance policy for a 25-year-old could cost Rs 12,000 per year for a sum assured of Rs 10,00,000. The risk for insurance companies is high here because they will have to pay a large sum if the person whose life is assured dies during the policy term.

So why does the insurance company bear this risk and how is it calculated?

Also Read: Income Tax: What are the 3 deductions under the new tax regime? 

What is insurance underwriting?

The insurance company calculates the risk so that it can be minimised and this process is called underwriting. 

It is the process of categorising risks and charging a sufficient premium to insure those risks. Simply put, it refers to the process of assessing the risk associated with each insurance proposal before deciding whether or not to grant insurance and at what cost.

Does underwriting apply to all forms of insurance?

All types of insurance rely on insurance underwriting. Individuals or businesses, by definition, transfer their risks to an insurer, who charges a fee to provide financial assistance in the event of a loss.

However, before issuing an insurance policy, insurers must understand the nature and scope of the risk they are taking.

How does insurance underwriting work?

-Most insurance companies while insuring a person or an entity evaluate the risk with the following process: 

-Reviewing the application of the person who wants to be insured

-Determining whether the insurance company should cover the applicant

-Recommending the kind of policy and conditions the insurance company will agree to

-Finding solutions that could reduce the frequency of future claims 

-Assessing the coverage if one has made multiple claims, had trouble making payments, or is taking out a new policy  

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