The Underwriting Process in Insurance
Underwriting decides who joins the pool, at what price and on what terms.
Underwriting is the process of deciding whether to accept a risk, and if so, on what terms and at what price. It is how an insurer keeps its pool healthy: accept too many bad risks at normal rates and the premiums collected will not pay the claims.
The word comes from the old Lloyd's practice of writing one's name under the description of a risk to accept a share of it. Today the underwriter is usually a trained professional at the insurer, working within the limits of the company's underwriting policy.
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The Underwriting Process, Step by Step
- 1
1. Receive the proposal
The proposal form, KYC documents and any supporting papers arrive, through an agent, broker, bank or online.
- 2
2. Check completeness
IRDAI requires insurers to process proposals under a Board-approved underwriting policy and to check that the form is complete. Anything missing, such as a medical report or a site survey, must be called for in one go within 7 days of receipt.
- 3
3. Assess the risk
The underwriter studies the physical hazard (construction, occupation, health) and the moral hazard (the person's history, motives and claims record), and compares the risk with the average risk the standard rate assumes.
- 4
4. Decide and price
Accept at standard rates, accept on special terms, postpone or decline. Set the premium, deductibles and any extra conditions.
- 5
5. Arrange capacity
If the sum insured exceeds what the insurer can keep on its own account, the underwriter places the excess with reinsurers before or while accepting.
- 6
6. Communicate
Tell the proposer the decision within 7 days of the proposal or the last requirement. A decline must come with reasons.
Where the Underwriter Gets Information
- check_circleThe proposal form: the primary source, backed by the duty of utmost good faith.
- check_circleMedical examination and tests, for life and health proposals above the insurer's non-medical limits.
- check_circlePre-acceptance risk inspection or survey, for factories, warehouses and other large property risks.
- check_circleThe agent's or intermediary's report on the proposer's background and circumstances.
- check_circlePast claims experience, including industry databases where available.
- check_circleFinancial documents, to check that the sum assured or sum insured is in line with income or the property's value.
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The Decisions an Underwriter Can Take
Accept at standard terms
When it is used
Risk is close to average
Example
A healthy 30-year-old non-smoker buying a term plan
Accept with a loading
When it is used
Risk is higher than average but insurable
Example
Extra premium for a proposer with controlled diabetes
Accept with an exclusion or deductible
When it is used
A specific part of the risk is unacceptable
Example
A health policy that excludes a known knee condition
Accept with a warranty
When it is used
Risk is acceptable only if a safeguard is kept
Example
A jewellery shop must keep stock in a locked safe at night
Postpone
When it is used
The risk is temporarily too uncertain
Example
A proposer awaiting surgery or test results
Decline
When it is used
Risk is too high for any premium
Example
A building with serious structural defects next to a fireworks godown
| Decision | When it is used | Example |
|---|---|---|
| Accept at standard terms | Risk is close to average | A healthy 30-year-old non-smoker buying a term plan |
| Accept with a loading | Risk is higher than average but insurable | Extra premium for a proposer with controlled diabetes |
| Accept with an exclusion or deductible | A specific part of the risk is unacceptable | A health policy that excludes a known knee condition |
| Accept with a warranty | Risk is acceptable only if a safeguard is kept | A jewellery shop must keep stock in a locked safe at night |
| Postpone | The risk is temporarily too uncertain | A proposer awaiting surgery or test results |
| Decline | Risk is too high for any premium | A building with serious structural defects next to a fireworks godown |
How IC-01 Tests This
Typical questions: "what is the main source of underwriting information?" (the proposal form), "what is a loading?" (extra premium for an above-average risk) and "why is a pre-acceptance survey done?" (to assess physical hazard on large property risks). Scenario questions describe a proposer and ask for the right decision.
The trap is assuming underwriting is only accept or decline. Most above-average risks are accepted on terms. A second trap is dated timelines: older material says a decision is due within 15 days; IRDAI's 2024 master circular sets 7 days.
FAQs
What is underwriting in insurance?expand_more
The process of assessing a proposed risk and deciding whether to accept it, at what premium and on what terms, so that the insurer's pool stays balanced and fair to all policyholders.
What are the steps in the underwriting process?expand_more
Receive the proposal, check it is complete and call for any further requirements, assess physical and moral hazard, decide and price the risk, arrange reinsurance if needed, and communicate the decision.
What decisions can an underwriter take on a proposal?expand_more
Accept at standard terms, accept with a loading, exclusion, deductible or warranty, postpone, or decline.
How long can an insurer take to underwrite a proposal?expand_more
IRDAI's 2024 master circular requires further requirements to be called for in one go within 7 days, and a decision within 7 days of the proposal or the last requirement, whichever is later.
Next steps
- Life vs Generalarrow_forward
- Proposal & Cover Notearrow_forward
- Physical & Moral Hazardarrow_forward
- Premium Ratingarrow_forward
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