Glossary of Business Insurance Terms
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Underwriting is the process insurers use to assess the risk of insuring a small business.

What is the underwriting process in insurance?

Underwriting is the process insurers use to determine the risks of insuring your small business. It involves the insurance company determining whether your business poses an acceptable risk and, if it does, calculating an appropriate premium for your coverage.

What is an insurance underwriter?

An underwriter is an insurance professional who specializes in risk assessment and prevention. As an insurance company employee, an underwriter represents the insurer, not the customer, in the purchase transaction.

Does underwriting apply to all forms of insurance?

Insurance underwriting is central to all forms of insurance - including but not limited to commercial insurancehomeowners' insurance, life insurance, and health insurance.

By definition, insurance involves individuals or businesses transferring their risks to an insurer, which charges a fee to provide financial assistance should a loss occur.

However, before an insurance policy is provided, insurers must understand the nature and scope of the financial risk they’re taking on, which requires risk assessment – or underwriting.

Underwriting applies to all forms of small business insurance, including:

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How does the underwriting process work?

Insurance underwriting involves assessing the factors that determine a potential customer’s risk profile. The specific factors depend on the type of insurance you’re applying for. These are the most common factors:

  • Type of business
  • Age of business
  • Financial characteristics (size, sales, assets)
  • Prior financial behavior (credit score, bankruptcies)
  • Condition of property
  • Prior insurance claims
  • Safety / security systems
  • Loss-prevention practices

Once an underwriter understands these factors, he or she will seek to determine whether your company has risk factors affecting your desirability as a purchaser of a specific business insurance type. For example:

  • If you’re buying general liability insurance, have you been sued before and for what reasons?
  • If you’re buying a business owner’s policy, do you have security alarms and is your building’s roof in good condition?
  • If you’re seeking insurance for your business vehicles, what is your driving record, and how many times have you filed accident claims in the past?

The point is, underwriters assess diverse types of customer data to determine whether their company should do business with you and at what insurance premium.

If the outcome of the analysis is unfavorable, then the underwriter might offer you options to take some risk “off the table.” For example, the person might suggest amending the coverage by endorsement to prevent you from filing certain kinds of claims. Although this makes the insurance less useful, it might be a better solution than going uninsured.

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How does an underwriter differ from an insurance agent or broker?

Insurance underwriters, along with the actuaries who create statistical models of future losses, create the underwriting system that determines to whom an insurance provider will offer coverage.

Insurance agents and brokers are the field representatives of this system. Duties they perform include:

  • Helping you understand the types of insurance you might qualify for
  • Helping you complete an insurance application form or an online quote request
  • Helping the underwriters interpret information about your business
  • Negotiating with underwriters
  • Educating you about the terms of the insurance policy you bought

In one sense, insurance agents (not brokers) do a form of underwriting. When you meet an insurer’s risk requirements, your agent can provide you with immediate insurance coverage, a process called binding.

If you have questions about your eligibility for business insurance, contact a licensed Insureon agent.

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Updated: March 18, 2024

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