Before an insurance company can offer you a policy, it has to decide if it can afford to take on the risk. The process it uses to figure this out is called underwriting. Essentially, the insurance company uses the information you provide on its application plus a few public documents to evaluate your chances of filing a claim. If your risk fits the company’s underwriting guidelines, it typically sets a premium and offers you a policy. That is the meaning of underwriting in insurance.
How the insurance underwriting process works
Most insurers have underwriting departments staffed with professionals who are trained in risk assessment. These underwriters are the people who decide if the insurance company will offer you a policy and how much that policy will cost.
When it comes to homeowners policies, the insurance underwriting process includes several steps, such as:
- Evaluating your information. Insurance applications often ask for basic information required by underwriters. This may include personal details, like your Social Security number, as well as certain construction details about your home.
- Reviewing the house’s loss history. The insurance company’s underwriter will most likely run a loss history. This is a report that details any insurance losses associated with your home, and it can help the underwriter identify potential issues that may make your home more costly to insure.
- Checking your credit history. An underwriter may check your credit to see if you’re capable of paying the premium. However, not every state allows insurance companies to consider credit reports during underwriting.
- Assessing your home’s condition. Your insurance company may also send a field underwriter to examine the exterior of your house to determine if the house is in good shape or in disrepair. Some companies can do this with satellite imagery.
- Solving problems. Part of the underwriting process includes working with you or your agent to get you insured. This may mean adding endorsements to your policy or asking you to make improvements to reduce your chances of a claim.
Once the underwriter has all the information, they assess the risk and assign a rate to it. This is how your final premium is calculated.
What is the underwriting review period?
Most states allow insurance companies a set time where they can review a policy’s underwriting, including the application and the actual property. This is called the underwriting review period, and it gives insurers a chance to make sure their evaluation of your home’s risk is fair, accurate and consistent with their underwriting guidelines.
The underwriting review period can be anywhere from 30 to 90 days, depending on the line of business and the state. During this time, an insurance company can cancel a policy for any reason, but it’s usually something with the property that makes it ineligible for coverage based on the carrier’s underwriting guidelines. Once the review period has passed, insurers can only cancel your policy for a limited number of reasons, which are typically identified by law.
Why is my premium different from my quote?
An home insurance quote is really just an estimate of your final premium, but it comes before the underwriting process is complete. This means that you can get a quote for an amount that is different from the actual cost of the policy.
For instance, let’s say you’re sure your home was built in 1965 and that you got a new roof just a few years ago. You put that on your application and get a quote of $1,100 per year for homeowners insurance. That sounds pretty good to you, so you decide to buy the policy and pay the premium. This triggers the underwriting process.
While searching public records, the underwriter discovers that your home was actually built in 1955 and that the roof is closer to 15 years old. These are not issues that cause the insurance company to reject your application, but they may cause the premium to go up.
In your case, the insurance company sends a policy with an updated premium for $1,200 per year. You can either pay the additional $100 of premium, or you can cancel the policy and get a refund for any unused premium.
