Insurance has been around since ancient times when it’s believed it first became popular as a risk-sharing scheme between ship owners carrying goods across the oceans and investors willing to provide indemnity for these goods and the ships carrying them for a fee. But even before this, a form of insurance can be found written within the Code of Hammurabi in about 1800 B.C. Here it was stated that loans owed by an individual needn’t be repaid if some personal catastrophe such as flooding, death or disability made it impossible.
Later on, in Europe during the Middle Ages, craftsmen guilds collected dues payments from each of their members and put them into a general fund that could be tapped in the event that one of these dues-paying members or their family required financial assistance. This could be as the result of a death or disability, robbery or a fire destroying their place of business. In effect, these guilds provided insurance funds for their members. There was no underwriting required in this type of risk-sharing arrangement and all members were equally eligible for benefits. This system was the precursor of group coverage insurance still found today.
What is Underwriting?
Underwriting is the process whereby an individual or entity takes on or shares the financial risk of another. While the process is mostly thought of as being a part of the insurance business, it may also be used in lending or in investments.
The use of the word underwriter is thought to have originated back in the 1600s when ship traffic between Europe and the New World was taking off. Colonists were being ferried to the New World and exotic goods like precious metals, sugar, coffee, chocolate, and tobacco were being brought back to Europe. There were many risks involved with these voyages, including pirates, hidden reefs, storms that could sink ships and even damaging shipworms that could disable a ship’s hull. Maritime insurance provided protection against these risks and more.
Lloyds of London
In 1688, a coffeehouse owned by Edward Lloyd located on Tower Street in London, England, became the center for buying and selling maritime insurance. The coffeehouse had previously served as the unofficial British Empire stock exchange and it now became the main meeting place for those such as ship owners and merchants seeking maritime insurance.
Venture capitalists who were financing the voyages to the New World needed a way to spread the financial risk involved with sending ships to far-off ports and at Lloyd’s coffeehouse, they were able to meet up with underwriters willing to take on a percentage of the financial risk of a ship and/or its cargo being lost to pirates or other ravages of the sea.
Shipowners and merchants seeking insurance coverage for a specific voyage would take a copy of the ship’s manifest down to Lloyd’s, now known as Lloyd’s of London, so investors gathering there could read it and decide if they were interested in underwriting a portion of that voyage’s financial risk. Those investors willing to take on a percentage of the risk would sign at the bottom of the ship’s manifest and indicate the percentage for which they were willing to be financially responsible. This was in exchange for a specified fee, or premium, which usually amounted to a percentage of the goods being brought back on the return voyage. This signing at the bottom of the manifest became known as underwriting. Though the mechanics of the transaction have changed over time, underwriting continues to be a primary feature today in the world of loans, investments, and insurance.
Today’s Underwriting Jobs
Setting aside the role of underwriters in the areas of loans and investments, insurance underwriters are responsible for evaluating insurance applicants to decide whether that applicant should be insured and, if so, the appropriate fee, or premium, to charge in return for the amount of coverage given. There are numerous types of insurance policies available in the marketplace and just about any potential financial loss can be underwritten by an insurer as long as it qualifies as being an insurable financial risk.
The four most common types of personal insurance include:
- Homeowners’ (or Renters’)
Most adults in the U.S. have at least one of these types of insurance and, in fact, auto insurance is required of drivers in nearly every U.S. state.
To qualify as being insurable, a loss must be:
- Caused by accidental means
Underwriting involves determining if a potential loss can be considered an insurable loss. If so, it’s up to you, as the underwriter, to conduct the needed research to assess the degree of risk an applicant represents in order to determine an appropriate amount of premium to charge in exchange for the amount of coverage given. All insurance revolves around risk. The more risks a particular insurance policy covers, the greater the amount of premium the insured should expect to be charged.
Typical Risks Covered by Typical Policies
One ever-present risk covered in numerous different types of insurance policies is liability. Required vehicle policies in most states are coverage for liability. This coverage provides financial protection for you, as a driver if you’re found responsible for causing a loss to someone else as a result of your driving. This loss could be the result of physical injury, death, or the damage/destruction of property such as someone’s fence or vehicle.
Vehicle liability coverage pays nothing to you, the policy owner, in the event of an accident that you cause. It does, however, protect you financially, up to the policy’s limits, if you are the subject of a liability suit.
As the underwriter, you’ll want to check on numerous factors to help determine the loss likelihood of a driver seeking automobile coverage from your company. This may include:
- Age and gender
- Driving record and credit rating
- Safe-driving school attendance
- Year, make and model of the vehicle being insured
- Number of miles driven and more
Each of these factors related to driving carries its own degree of risk. Obviously, someone with a history of DWIs (or DUIs) will be riskier to insure than someone with a 20+-year clean driving record. As an underwriter, it’s your job to determine how much riskier or whether the risk is too high to even offer a policy to a high-risk individual.
Homeowners’ Insurance Risks
When underwriting a homeowners’ policy, there’s a long list of risk factors to take into consideration. You’re insuring the physical structure against damage or destruction, as well as outside additions such as fences, sheds, garages, swimming pools, etc. You’re also covering everything found in the house such as clothing, furniture, appliances, and more. Additionally, you’re extending liability protection against liability suits in the event that someone becomes injured or killed while on your property. As noted earlier, the more risks a policy covers, the higher the cost.
As a homeowners’ insurance underwriter, you have to consider the value of the property, the insured and his/her family, the neighborhood, and adjacent exposures but also the claim history of the house and any high-risk equipment such as trampolines or swimming pools. In-depth research and a quality property inspection can help ensure underwriting accuracy.