What Is Underwriting?
Learn the ins and outs of insurance underwriting.
When you submit an insurance claim—whether for a fender bender or a flooded basement—you expect your insurer to keep its promise and pay for your loss. Underwriting is a risk evaluation process that helps an insurance company remain fiscally strong. So when something happens that's covered by your policy, your insurer has the funds to swing into action and pay your claim.
What does an insurance underwriter do?
Think of it like this: When you’re walking out the door in the morning, you need to assess the risk of rain so you can decide whether or not to grab your umbrella. Underwriters at insurance companies also assess risk, analyzing data and using complex formulas and software programs to decide whether to sell someone a policy and how much to charge for that policy. The riskier someone seems, the higher their rate will be. These folks work behind the scenes, so as a customer, you’ll never interact with an underwriter.
Insurance underwriters spend a lot of time calculating odds. If an auto insurance company decided to specialize in covering only reckless drivers (high risk), it would likely pay too many claims and would soon be out of business. On the other hand, if an insurer played it safe, turning down anyone who’s ever had an accident, it wouldn’t be able to sell enough policies to stay in business. It’s all about balance.
Did you know? The word "underwriting" is believed to have been coined by Lloyd’s of London, which has insured everything from soccer star David Beckham’s legs to the Titanic. It's said that Lloyd’s would have the customer write their name under the text describing the item or event that was being insured, giving us the term "underwriting."
How long does underwriting take?
The length of the underwriting process varies by insurance company. You can get an auto insurance quote pretty quickly (sometimes within 15 minutes), but the full underwriting process may take 30 to 60 days. If the underwriter then discovers traffic tickets or collisions, the quoted rate might change or the policy might be canceled. Homeowners insurance underwriting can also take up to 60 days, and may include a home inspection.