We cannot emphasize the importance of having an insurance contract enough, whether it is to protect your life, your health, your home, your vehicle, etc. However, from a business standpoint, it does not make any sense for insurance-providing companies to give a certain type of insurance, say term-life insurance to just about anybody. Not everybody is at equal risk of death during the term period and hence not every insurance policyholder should pay the same premium. These companies cannot take on the risk of issuing a policy if the odds of a costly payout are too high, like for patients with a history of cancer.
To overcome this problem, an important process called insurance overwriting is carried out by these companies. Investopedia.com defines overwriting as the "re-evaluation of the riskiness of a proposed deal or agreement", and professionals who carry out the task of evaluating and analyzing the risks involved in insuring people and assets are called insurance underwriters. Their task is to establish premium pricing for accepted insurable risks. These underwriters use specialized software to determine the likelihood and magnitude of a risk.
Homeowner insurance underwriters, for example, need to consider many variables like foundations, roofs, poor structure, and other hazards when rating a homeowner's policy. These properties will be inspected by underwriters to find out the details of these characteristic factors, including the policyholder's credit rating. The underwriters can then employ an algorithmic rating method to define the monthly premium of the contract that the policyholder will have to pay. The underwriters can also consider any subjective statements issued by the policyholder.
The process for underwriting term life insurance contracts isn't too different either. After you apply for insurance, you will be evaluated on your application details, health information, financial details (if you have the earnings and savings to afford this insurance), and lifestyle to give you an insurance classification, which correlates to how likely you are to die before the end of your policy’s term and your premium is based on that. For example, a policyholder with a history of smoking, drinking, and lethargic lifestyle choices will be liable to pay more premiums for the contract. On the contrary, a younger and healthier policyholder will be liable to pay much lesser amounts in monthly premiums.
Factors affecting your insurance contract
Adding on to the previous paragraph, certain factors, in particular, vary the amount of premium and coverage on your insurance contract. These broadly include -
Age - One of the critical factors regarding the premium amount, insurance companies are aware that older people are more at a higher risk of suffering from illness than youngsters. Therefore, they follow the thumb rule that the higher the age, the higher the premium on your contract, which is why it is advisable to buy a health insurance premium when you are younger.
Gender - Scientifically and statistically, women are expected to live an average of 5 years more than men. This means that women can avail their policies longer than men at lower life insurance premiums.
Occupation - The risk profile of your occupation varies from job to job and this profile affects your premium charges. For example, if you work in a school or an IT environment, your premium will be lesser, but if you work in a construction site or a factory where the risk of being injured is higher, then the premium amount will be higher.
Geographical location - The premium rates are higher in certain towns or cities due to the relative unavailability of healthy food options, climate, and risk of higher health issues.
Medical records - The underwriting process includes a thorough medical exam of the policyholder candidate. This exam's results speak on the status of your physical health and can indicate possibilities of potential illnesses you are likely to contract later on. These findings also play a pivotal role in determining the premium you'll have to pay for your life insurance.
Family history - Hereditary diseases like haemophilia, thalassemia, or even diabetes can alert insurance companies. The risks of these diseases are reflected in the medical history of your family and do affect the premiums you'll have to pay.
Smoking history- People who smoke are much more likely to contract various illnesses and have a higher mortality rate as well. Therefore, it's no surprise that the premiums for smokers tend to be higher than those of non-smokers.
Underwriters vs agents/brokers
You will need to be cautious to understand the difference between insurance contract underwriters and agents/brokers. An agent or broker primarily sells these policies while an underwriter decides whether the insurance company should be ready to sell that contract, and if so, at the best convenient price. Underwriters mostly work for insurance carriers while agents or brokers are usually independent of the insurance companies.
Agents aren't typically permitted to make decisions beyond the basic rules they're given in the underwriting manual. While they can decide that a particular contract may or may not be beneficial for you, they can't ensure special arrangements to offer you insurance without the approval of the underwriter. The word of the underwriter is final in these cases.
The underwriter, hence, protects the insurance company by ensuring the rules and conditions are met by assessing risks based on their parameters.
On a side note, in situations where, for instance, you are buying a bundled insurance policy where the level of insurance is low, or if you are buying a health insurance policy at a younger age at a lower cover, even a simple declaration and contract agreement will work without the arduous process of underwriting. However, this will not be applicable if you are planning on a term life insurance plan, or a health insurance policy with a higher cover.