What Is an Insurance Underwriter?
Insurance underwriters are professionals specializing in evaluating and analyzing the risks involved in insuring individuals and assets. They are responsible for establishing pricing for accepted insurable risks. The term underwriting refers to receiving remuneration for the willingness to take on a potential risk. To determine the likelihood and magnitude of these risks, underwriters utilize specialized software and actuarial data.
Key Takeaways
- Insurance underwriters evaluate risks and set appropriate pricing for insurance policies.
- Investment banking underwriters guarantee a minimum share price for companies during IPOs.
- Commercial banking underwriters assess the risk of lending and charge interest to mitigate it.
- Insurance underwriters assess future event risks and charge premiums, promising compensation in case of specific eventualities.
Rising Above: The Role of Investment Banking Underwriters
Investment banking underwriters typically guarantee a specified amount of capital to corporations during an initial public offering (IPO). This capital is sourced from investors, while the bank acts as a facilitator for the transaction. Through this process, the underwriting bank takes on the underwriting risk by promising to deliver the proceeds of the sale to its client, regardless of the sale’s success or failure.
Navigating Risks: The Essential Function of Insurance Underwriters
Insurance underwriters handle risk assessment for contracts with individuals or entities. For instance, an underwriter may cover the risk of home fire costs in exchange for a insurance premium. Before the policy period—and at renewal—underwriters evaluate an insurer’s risk.
Consider the example of homeowners insurance: underwriters must account for numerous factors when rating a homeowner’s policy. Property and casualty insurance agents, acting as field underwriters, initially inspect properties for defects such as deteriorated roofs or foundations and relay these risks to the home underwriter.
Beyond structural issues, the home underwriter contemplates other hazards like unfenced swimming pools, cracked sidewalks, and dead trees, which could potentially lead to liability claims. Risks include accidental drownings and slip-and-fall injuries.
Homeowners insurance premiums are determined via algorithmic rating methods inputting various factors, including an applicant’s credit rating. The resulting premium is based on data from field reports and answers on the policy application. Underwriters strike a balance to prevent paying excessive claims while remaining competitively priced.
Evaluating Borrowers: The Role of Commercial Banking Underwriters
Commercial banking underwriters assess the creditworthiness of borrowers to decide loan eligibility. Borrowers are typically charged fees to account for the potential risk if they default on the loan.
Safeguarding Health: Medical Stop-Loss Underwriters
Medical stop-loss underwriters evaluate the risk profiles of self-insured employer groups based on individual health conditions. These underwriters protect employers—who pay their employees’ medical and prescription claims—by evaluating the risk from large, unforeseeable medical costs such as organ transplants or cancer treatments. Thus, they balance premiums according to potential claim risks.
Fast Fact: Insurance underwriting is a lucrative industry. Notable investors, like Warren Buffett, have leveraged insurance premiums to fund investments at companies such as Berkshire Hathaway.
References
- Berkshire Hathaway. “Berkshire’s Corporate Performance vs. the S&P 500”, Page 6.
