De-jargoned: The meaning of under-writing in insurance

The process of underwriting starts with gathering information about you. You start by filling up a proposal form, which seeks the relevant information from you

Deepti Bhaskaran

Insurance is not like other financial products. You need to be eligible to get insured and in insurance parlance, this eligibility assessment is called underwriting. The process of underwriting helps insurers assess the risk before they accept to insure it.

Underwriting, in fact, also helps in pricing the insurance products. For instance, in the case of life insurance, smokers pay a higher premium than non-smokers. Underwriting is an essential part of insurance. Here we explain its process and how all the information you provide impacts the insurance cover that you get.

The process

The process of underwriting starts with gathering information about you. You start by filling up a proposal form, which seeks the relevant information from you.

This information includes details such as your name, age, income and occupation; but even these general details have a role in the process. For instance, your age will determine the premium you need to pay—older people pay more than the younger ones.

Your income tells the insurer the level of insurance you may need and what you can afford. Life insurance is a policy that you buy for your dependants, to protect them financially. The insurance amount should be in sync with your income. So, a person earning Rs3 lakh a year would find it difficult to buy an insurance cover of, say, Rs1 crore.

The second set of queries is about your health, and medical underwriting is also a crucial part for insurers. The insurance company needs to have a clear picture of your health before insuring you.

Now, depending on the kind of policy you buy, and the level of insurance cover, there are two ways in which the insurer seeks this information.

The first is a simple declaration from you. Questions in the form revolve around your personal health and the medical history of your family.

A simple declaration works when, for instance, you are buying a bundled insurance policy where the level of insurance is low.

Or, if you are buying a health insurance policy at a young age and for a smaller insurance amount, the insurer may accept just the declaration from you.

But if you are buying a pure term plan, or a health insurance policy with a high cover, a simple declaration won’t do.

The insurer will ask you to go for medical check-ups. Those in higher age groups, or buying insurance cover of a large amount, are specifically asked to go for medical examinations. For life insurance, the cost of medical check-up is borne by the insurer.

If you decide to return the policy, then this cost is deducted from the refund. In case of health policies, the insurer could pay, or ask you to pay or reimburse this cost.

Policy issuance

Once the process of underwriting is over, the insurance company accepts you and you get the policy document.

But, if during the process of underwriting it’s found that you are at a higher risk, the insurer may decide to load your policy and give you a counter offer. If you accept it, you need to pay the extra premium and only then the policy is issued to you.

Source: livemint