Insurance is a strange beast. You pay money to protect yourself for a situation that may never happen. You have to answer a whole load of questions before you can even get a price for a policy and some people can’t even get insurance at all. What’s more, it’s possible that your friend is paying a completely different price each month for exactly the same amount of cover.
Yes, the world of insurance may seem a complex and mysterious place – but there is method in the madness.
This is where insurance underwriting comes in. An underwriter is an individual trained in evaluating risks and determining rates and cover levels for them. By collecting information from you, an underwriter will assess how likely you are to make an insurance claim and then price your policy accordingly. Underwriters base their evaluation on claims statistics as well as their own experience of the industry.
If you are seen as a high risk by an underwriter, you’ll find that your premiums are set higher to balance out the risk you pose to them. Vice versa, if you’re seen as a low risk, you’ll find your premiums are lower.
How do underwriters decide how risky you are? Well, they do this from information that you provide them with.
Before you get offered a policy, you’ll need to give certain details to the insurance provider. The information required will be pretty similar across all insurance companies, although some providers choose to rate on different details, so questions may vary.
Let’s take home insurance as an example. Firstly, you’ll need to give your postcode, which will have a bearing on the price you pay for your cover. Certain areas are deemed as high risk based on crime statistics and claims data. For more information on this, check out our blog post: do you live in a crime hotspot?
The type of property and its location will also affect on the price you pay. For example, a thatched property will normally be seen as higher risk than a standard town house with a slate roof. This is because there’s a higher risk of extensive damage by fire and any repair work would require specialist skills and materials. If you have a thatched property and you declare that you’re a smoker, that’s an added layer of risk.
Some insurers may ask if you have a cat or a dog, as pets can often be the cause of damage in the home and the cause of a claim. Some may check if you have any large trees very close to your property, as these could pose a threat to the structure of the building. All your answers are used to build up a rounded risk assessment of the property you want to insure.
Some evaluations may seem surprising. You may think a large, detached house would be more expensive to insure than a little terraced property. However, if a terraced property were to suffer extensive damage, like a fire, it’s likely that the damage would spread to the neighbouring homes either side. This could therefore result in a very expensive claim for the insurer.
Occasionally, an underwriter will decide that the risks are too great and refuse to cover an individual. For example, if you live in an area that’s prone to flooding, some insurers will not offer you a policy as they feel a large claim from you is highly likely in the future. Specialist high-risk insurers may be able to offer you cover in this instance.
The security features of your home may also affect your premium price. If you have a top floor flat, with top of the range door locks and a burglar alarm – an underwriter may feel it’s unlikely you’ll suffer a burglary. However, a ground floor flat with sliding patio doors could be considered more at risk of a break-in. Statistics show that sliding patio doors are often the entry point for intruders.
Underwriting works this way for all types of insurance. It’s a process of taking all the available information and analysing it carefully to build up an accurate risk profile. The more information the insurer has, the better their assessment.
On the surface, an insurance application might appear to be high risk, but through a process of layering all the available information – the risks may be balanced by other factors. For example, a scaffolding engineer working at height might seem like a high risk for a business insurance provider. However, if they are experienced and fully trained in working at height – they’re a lower risk than someone in the same job without the relevant training.
It’s important to be completely honest when applying for insurance and answer all questions accurately and fully. If you have given false information or failed to inform your insurer about changes in your circumstances, you could risk invalidating your insurance.