What is Underwriting ?
As per IRDA, “Insurance other than ‘life insurance’ falls under the category of general insurance”. Underwriting is the process of determining the level of risk presented by a proposer and deciding whether to accept the risk or not, if yes then at what terms and at what price.
Purpose and Objective of Underwriting
The main purpose and objective of underwriting is risk transfer. By purchasing an insurance policy, the policyholder transfers his risk to the insurance company against which he needs to pay a certain amount as premium. Underwriting enables the insurer to stay competitive, and at the same time be solvent and profitable. It is important to Brokers and Agents as it will match the needs of consumers with the standards set by insurer.
There are three underwriting functions i.e. risk selection, classification and rating, and policy selection. It means the underwriter determines that a certain risk is acceptable upon which the underwriter proceeds to classify and rate the risk and issues the relevant policy. The purpose of using classification is to separate risks into homogeneous groups to which rates can be assigned. Rates are not the same as premiums. A rate is the price of a given unit of insurance. Rates vary according to the likelihood and potential size of loss.
The underwriting of risks can be classified into the following broad categories: property risks, business interruption risk, personnel risks, liability risks, package policies.
Requirement of Regulation
Regulation of the insurance industry is necessary to maintain insurer’s solvency, to protect consumers who have inadequate knowledge of insurers and insurance practices, to ensure reasonable rates, and to make insurance available.
Market regulation comprises a number of different aspects of insurers’ activities, including:
- Policy forms and terms
- Underwriting practices
- Marketing and distribution
- Claims adjustments