Who is an underwriter?
An underwriter is a finance professional employed by an insurance organization to evaluate the risks associated with insuring individuals, organizations, businesses and assets. Based on this risk evaluation the underwriter assigns an adequate premium to the insurance policy. An adequate premium must generate a profit while also covering anticipated losses and business expenses. Policies with a higher likelihood of loss (or higher risk) are assigned a higher premium in comparison to lower risk policies with the same insurance coverage.
In today’s insurance environment most insurance companies implement computerized underwriting systems which automate the underwriting process at the point of sale. This is an automated computer program that groups insurance applicants by similar characteristics and segments them into “buckets”, assigning each bucket a similar policy premium.
What does an underwriter do?
If underwriting is performed by a computer, then what does an underwriter do?
Good question. One of the most important tasks of an underwriter is creating and developing the underwriting guidelines. The underwriting guideline is a written manual specifying the exact risks and characteristics of an insurance application that an insurance company is willing to insure. For instance, the underwriting guideline might state that it will “Reject any auto insurance application where the vehicle is older than 30 years old”.
The underwriting manual defines the rules by which the computerized underwriting system uses to determine the appropriate premium for each policy and determines which policies are accepted, rejected or flagged for manual review. Since the insurance environment is constantly changing, the underwriter must frequently monitor and adjust the underwriting manual to remain profitable. Using predictive models and trend analysis to evaluate hundreds of thousands of data sets, the underwriter can determine exactly which policies the insurer should accept and which prices create a profitable business.
In some cases, the underwriting system flags a policy for manual review. A policy is flagged when it is right on the edge of being accepted or rejected. In these cases, an underwriter must manually review the policy to analyze the risk characteristics and choose to accept, reject or modify the application. Many smaller insurance companies still manually underwrite all of their insurance applications, meaning the underwriter manually investigates and researches the risk of each insurance application to assign a premium and choose to accept or reject the applicant.
Other underwriter tasks:
- Review and analyze the customer base to evaluate trends in profit and loss
- Recommend improvements to underwriting guidelines
- Prepare underwriting reports
- Provide underwriting advice to clients and insurance agents
- Ensure compliance with government regulations
- Work with marketing team to target profitable customers
- Work with insurance agents to explain target market
- Work with IT team to develop and improve underwriting systems
Requirements and tips for becoming an underwriter
A career in underwriting typically requires a bachelor’s degree. A degree in business, finance, economics, math or statistics is most desirable but insurers are typically open to a data oriented applicant with an attention to detail from all fields of study. In addition to a college education, anyone pursuing a career in underwriting should strongly consider pursuing their underwriter certification. In the USA this is the CPCU designation, in Canada this is the CIP designation. Although it is not required to become an underwriter, it is extremely desirable and correlates with increased performance, responsibility and salary.
- Detail oriented
- Investigative nature
- Ability to analyze and investigate large amounts of data
- Ability to reach sound decisions with supporting data
- Ability to coordinate and organize complex tasks
My life as an underwriter
As an underwriter myself for a number of years, I truly enjoyed the analytical and investigative nature of the career along with the opportunity to be an integral part of the insurance environment where my decisions directly impacted the performance of the company.
As an underwriter you really get to see it all. My fondest memory as an underwriter occurred while manually underwriting a new business application that had been accepted by our computerized underwriting system but was very close to being rejected. In this case, the policy required an underwriting review because the applicant was requesting the maximum coverage limit for a home valued at $300,000. Now usually this is an easy one. As long as the house is in good condition with no outstanding exposures, it’s an automatic approval. But not in this case….I conducted my typical investigation, reviewing the exposures and didn’t find anything out of the ordinary; no prior claims, one small dog on the premises (a Pomeranian Poodle), a fenced in backyard, no kids, no pool, and no damage to the home. Everything looked good, but I decided to do a quick view of the property using Google maps before I made my approval…That’s when, to my surprise, I could visibly see 12 “Beware of Dog” signs posted around the entire property. 12 signs!!! Now I’m not sure if you’ve ever seen a Pomeranian Poodle, but they’re little fluff balls that could barely hurt a fly. So why the heck would they need 12 “Beware of dog” signs around the house?!
That immediately threw up a red flag in my mind, either this applicant has the most dangerous Pomeranian Poodle on the face of the earth, or they were lying about the breed of their dog.
I immediately ordered an onsite inspection on the home so we could get a thorough analysis of the property and confirm the dog breed. Come to find out the applicant did not own a Pomeranian Poodle; they actually owned a Pit Bull, one of the most aggressive dog breeds and a strict “do not insure” in our underwriting guidelines! Since our underwriting guidelines clearly stated that we do not accept any homeowner applications if the homeowner owns a Pit Bull (among other aggressive dog breeds), the policy was immediately canceled.
This investigation led to further research into our homeowner insurance policies. Come to find out, our computerized underwriting system did not require the insurance applicant to validate the breed of their dog, leaving us exposed to loss caused by applicants that lie about their dog breed. Based on this finding we created logic in our computerized underwriting system that required a mandatory onsite inspection of all applications that owned a dog. This helped us to better reduce the loss faced by dog attacks and helped us to more accurately assign the appropriate premiums to dog owning homeowners.
If you’re looking for an interesting career in one of the most stable industries in the world, where each day brings new thought-provoking analysis and investigation, I strongly recommend pursuing a career as an underwriter. I loved it and you will too.
Types of underwriters
In this article I primarily focused on the career of an insurance underwriter, but that’s not the only type of underwriter position
Two other types of underwriter:
- Bank underwriter
- Investment underwriter
A bank underwriter, similar to an insurance underwriter, is responsible for analyzing the risk of their customers. The difference is that a bank underwriter is analyzing an individual or organization’s application for a bank loan. The bank underwriter investigates the applicant’s “credit worthiness” by reviewing the applicant’s credit reports, employment history, salary and debt to income ratio. Based on the underwriter’s evaluation of the applicant, a bank will choose to accept or deny the applicants request for a loan.
An investment underwriter, just like an insurance underwriter and bank underwriter, is responsible for analyzing and assessing risk. An investment underwriter works for an investment bank and evaluates the risk of various business transactions such as mergers, acquisitions, public offerings and refinancing. Based on the underwriter’s evaluation, the investment bank will choose to pursue or not pursue the business transaction.
Jake Lang is an industry expert as the founder of AssociatePI.com, dedicated to improving CPCU studying along with years of experience in various roles including underwriting and product management