Underwriters play a critical role in the insurance industry by assessing risk and determining premiums for insurance policies. As gatekeepers, underwriters carefully evaluate applications to determine whether to approve coverage and at what price. Let’s explore what exactly underwriters look for when reviewing an application.
Financial Health
One of the main things underwriters look at is the financial health and stability of the applicant. Strong finances generally indicate lower risk. Underwriters will examine income, assets, liabilities, credit history, and other financial records. Higher income and substantial assets tend to make applicants more favorable. High levels of debt or a poor credit score can raise concerns.
Income and Assets
Underwriters verify income documentation and assets listed on an application. Steady employment in the same industry for several years can demonstrate financial stability. Significant assets – such as real estate, investments, and savings – also contribute to financial strength.
Liabilities and Credit History
Too much debt in relation to income and assets can signal risk. Underwriters check credit reports for late payments, defaults, judgments, and bankruptcies that indicate how an applicant handles financial obligations. A strong credit score (700+) is ideal, while a poor score (below 600) can cause denials or higher rates.
Medical History
For life and health insurance, medical histories are scrutinized closely by underwriters. Certain health conditions or habits may increase the risk of claims and costs for the insurer. Underwriters thoroughly review medical exam results, lab tests, and health records.
Pre-existing Conditions
Serious pre-existing medical problems like cancer, heart disease, or chronic illness can lead to denials or ratings for higher premiums. Even mild conditions are noted. Applicants are required to disclose any past or current medical treatment. Underwriters look for stability and control of conditions over time.
Family History
Conditions that run in the family – like cancer, diabetes, or heart disease – raise concerns since they increase susceptibility. Underwriters look closely at the health of parents and siblings of applicants.
Lifestyle Factors
Habits and behaviors also factor into life insurance risk. Tobacco use, alcohol abuse, drug history, and high-risk hobbies influence underwriting. Safe lifestyles are viewed favorably while dangerous activities may result in declined applications.
Age
Younger applicants represent lower mortality risk for life insurers, leading to lower rates. With age, risk increases and so do premiums. Older applicants undergo extensive reviews to determine appropriate charges based on health and life expectancy. Seniors with medical issues may be declined.
Mortality Tables
Underwriters rely heavily on actuarial mortality tables showing statistical death rates by age. These help determine a standard premium for each age band. Applicants with reduced life expectancy may be rated for higher premiums.
Age of Dependents
For life insurance applications, underwriters consider if the insured’s death would financially impact dependents. Young dependents – like minor children – have greater need for income replacement and death benefit coverage.
Hobbies and Lifestyle
Dangerous hobbies and activities raise red flags for underwriters. Things like skydiving, rock climbing, auto racing, and scuba diving increase mortality risk. Foreign travel to high-risk regions can also impact approvals and pricing.
Motor Vehicle Records
DWI or DUI convictions and a history of moving violations like speeding tickets demonstrate greater risk on the road. Underwriters access motor vehicle records to check driving history and may deny coverage or increase rates for unsafe drivers.
Smoking and Nicotine Use
Tobacco use remains one of the biggest factors in underwriting. Smoking can double life insurance rates compared to nonsmokers. Underwriters look for frequency of use and may approve mild smokers at lower rates. Vaping and e-cigarettes are treated similarly to smoking policies.
Occupation
Hazardous jobs where accidents or injuries are more likely may face additional scrutiny from underwriters. Examples include construction workers, loggers,commercial fishermen, military personnel, police officers, firefighters, pilots, and miners. These occupations often result in rating policies for higher premiums or exclusions.
Work Duties and Environment
Underwriters examine the actual work duties and conditions, not just occupation title. A desk job at construction firm may be rated lower than a job site foreman. High-risk hobbies are also reviewed for those with hazardous vocations.
Changing Jobs
Job changes may raise concerns over instability and income reliability. Underwriters look for consistent employment in the same industry and reasons for change, such as layoffs. Frequent job hopping results in stricter reviews.
Criminal and Traffic Records
Serious criminal convictions and traffic offenses raise underwriting concerns over character, judgment, and unlawful behavior. Crimes like fraud, assault, DUI, or arson often lead to non-standard policies with higher rates or declined applications.
DUI/DWI Convictions
DUIs demonstrate heightened risk both on the road and in judgment. Recent DUI convictions result in postponement of coverage. After 5 years, standard rates may be available with proof of treatment and clean driving.
Bankruptcies and Financial Crimes
Bankruptcies, tax liens, and financial charges like identity theft or fraud require careful review by underwriters. Applicants must demonstrate rehabilitated finances before obtaining coverage.
Foreign Travel and Residence
Frequent foreign travel, especially to high-risk regions with political unrest or high crime, is closely evaluated. Underwriters look at the purpose, frequency, and duration of trips. Study abroad, voluntary work, and adventure tourism receive greater scrutiny.
Country Ratings
Insurers classify countries into risk categories, with higher rates for travel to dangerous areas. Regions with civil unrest, high disease rates, poor health care, and high crime are all concerns.
U.S. Expatriates
Americans living abroad long-term may be declined coverage. Underwriters prefer U.S. residents and closely assess foreign residents regarding health care access and mortality risk factors.
Family and Personal History
Past and current personal issues and family history help underwriters assess character and future insurability. Areas of focus include mental health, substance abuse, driving record, risky hobbies, criminal history and bankruptcies. Applicants may need to demonstrate rehabilitation over time.
Mental Health
Severe mental illness like schizophrenia, psychotic disorders, and substance abuse treatment raise underwriting concerns. Milder conditions like anxiety may be acceptable, especially if controlled with treatment and medication. Suicide attempts postpone approval for several years.
Family Medical History
If close family members have died at an early age from conditions like cancer or heart disease, it raises concerns about the applicant’s longevity and mortality risk. Certain illnesses that run in the family result in higher scrutiny.
Type of Insurance Product
Requirements vary based on the insurance product. Term life, permanent life, disability income, long term care, and annuities all have specific underwriting considerations.
Term vs. Permanent Life
Term life underwriting focuses on near-term mortality risks. Permanent life (whole, universal, variable) requires evaluation of lifelong risks since coverage does not expire.
Disability Income Insurance
For DI underwriting, occupational duties and potential for injuries receive greater emphasis over health history, which is still reviewed. Dangerous jobs face scrutiny to avoid claims.
Amount of Insurance
Higher face amounts mean greater financial risk for the insurer, resulting in tighter underwriting. Jumbo policies over $1 million+ typically require physical exams and records review. Large policies also require financial justification to establish a need.
Insurance to Income and Assets
Underwriters look at the ratio of life insurance coverage requested relative to income and assets. High ratios may indicate attempts to profit from death benefits. Limits may be imposed.
Coverage Over Age 65
Large policies on older applicants draw increased scrutiny regarding life expectancy and potential for lapse before premiums recoup costs. Underwriting looks for indications the policy is meant for death benefits versus retirement income.
Conclusion
Underwriters play a key role in the insurance process by thoroughly evaluating applicant information to classify risk. While underwriting practices vary by insurer, the main objective is to determine a fair premium based on the likelihood of a claim. Applicants can help facilitate approvals by being honest, maintaining healthy lifestyles, controlling health conditions, and limiting financial obligations.