What is life insurance underwriting?

Haven Life and its approach to life insurance (innovative use of technology; providing an experience that is quick and pleasant) are new, but the concept of insurance itself is very old, dating back to around 3000 B.C., when Babylonian traders and merchants started pooling money in order to protect themselves financially against loss (which was often caused by pirates). During the intervening 5,000 years, insurance products have become more sophisticated, but underwriting has remained at its core.

This raises two questions: What is underwriting, anyway? And how does it affect you?

“Underwriting is evaluation of risk,” says Laura Boylan, Haven Life’s head of underwriting services. Essentially, an insurance underwriter assesses the riskiness of an applicant, determines whether their company should insure that person, at what price, and for what amount of coverage. “This is true for all kinds of insurance,” says Laura, including home, where the “risk” would be damage to a property; auto (damage to a vehicle); and, of course, life insurance, where the thing underwriters call “risk” is usually referred to as “death” by the rest of us.

While the idea is simple (evaluate risk, attach a price to it), the risk assessment and underwriting process has become especially complex in recent decades. As with an auto or mortgage underwriting process, life insurance underwriting is based on a few factors. The modern life insurance policy began with the industrial revolution in the 1800s, but the underwriting process was fairly basic until the 1940s. Until then, insurance premiums were based entirely on age. After that, insurers started considering gender, too (male mortality rates are generally higher than female rates).. With the advent of more technology and more data from the second half of the 20th century onwards, however, the range of factors which insurers consider has expanded, as has their ability to consider them in detail.

Rate classes

Underwriting, and insurance in general, is based on “the law of big numbers,” says Laura. “We can’t know an individual’s level of risk precisely, but we can get a good level of precision for a group of people if the group is large enough.” Therefore, insurers look at an individual in terms of age, health, behavior and other factors, then assign that person to a particular “risk bucket.” These are called “rate classes” in the insurance world. While you are offered an insurance policy tailored to you, it’s actually based on the rate class that you’ve been assigned to, based on your individual data.

So what do insurers assess in order to put people into rate classes, and therefore determine the policy you’ll be offered?

Your physical health

Physical health is also another factor that is considered in underwriting guidelines. “For life insurance underwriting we’re looking at a number of dimensions, one of which is medical,” says Laura. “We take self-reported medical histories, data such as prescription history, family history, tobacco use, and evaluate it all to get a deeper understanding of applicant health.” Sometimes a medical exam will form part of that data, although “at Haven Life life we have a no-medical exam process that allows some applicants to be issued an offer in as little as 40 seconds. It’s a wonderful experience for people that qualify,” says Laura. For those applicants who do require an exam, she has some useful advice: “Just because you might need to do a medical exam, it doesn’t necessarily mean your premium will be higher — it just means the company doesn’t have enough specific information to be confident in its decision without fluids.

Your financial health

Also considered by an insurer in underwriting guidelines? Financial health. “There’s also a financial element to your risk assessment: making sure an insurance policy is appropriate for an individual’s financial situation,” says Laura. Obviously, an insurance company wants to know if an individual has the income to afford their premium, but beyond that, can a person be over-insured? “We want to make sure the death benefit is appropriate,” says Laura, “just to make sure all the incentives are aligned appropriately.”

Behavior

Another factor considered by insurance underwriters is behavior, which includes “driving history, occupational history and hobbies,” says Laura. Unsurprisingly, a firefighter who races motorcycles in his spare time will usually pay more for life insurance coverage than someone who works in an office and spends weekends in their garden.

But for less extreme examples, isn’t the idea of dangerousness subjective? How do insurance companies define “risky”? “It’s a combination of different data from different industries and different levels of expertise,” says Laura. “For example, at Haven Life we have doctors on staff who evaluate specific diseases and how they relate to risk. Each individual situation is different. That can be as nuanced as, for a certain type of cancer, looking at the size and grading of a tumor and the probable progression of that disease. When it comes to behavioral risk — factors like driving history and hobbies — there is also data that correlates those types of things with mortality. The life insurance industry as a whole has a tremendous amount of data correlating those inputs to mortality outcomes going back decades.”

However, while “on the majority of things there’s pretty clear consensus on what’s risky and what’s not, insurers take slightly different perspectives at the margins,” says Laura. “Some carriers are very risk averse for certain hobbies. It might have just been one claim they saw [which made them that way]. By the same token, some carriers feel they have the data to support a looser stance on a specific risk. Sometimes it might come down to having a specific insurance underwriter or physician at your company that really has the expertise you need to evaluate a specific risk. There are also just different philosophies at different companies. Marijuana use is an example where, over time, different companies have moved at different speeds. Some carriers take a conservative approach and others have loosened up as it becomes legal in more states.”

Outliers

These “different perspectives at the margins” mean that if you’re a life insurance outlier — risky behavior or job; difficult medical situation — it’s best to shop around. Says Laura: “For people that have serious medical conditions there are specific insurance brokers that make their living by knowing the differences between different carriers and helping high risk applicants find the carrier that will view them most favorably.”

Each individual situation undergoes its own risk assessment based on the specific information provided. Some individuals may be considered high-risk, while others may not. Even if you’re not a high-risk applicant, we would always suggest you shop around for the best price and service before choosing your life insurance policy. A little extra time up front can pay off considerably when it’s time to select your coverage — and for anyone hoping to find cheap term life insurance policies.

It’s important to be honest in the application process. The issuance of the policy or payment of benefits may depend upon the truthfulness of answers you give in the application.

Haven Life and its approach to life insurance (innovative use of technology; providing an experience that is quick and pleasant) are new, but the concept of insurance itself is very old, dating back to around 3000 B.C., when Babylonian traders and merchants started pooling money in order to protect themselves financially against loss (which was often caused by pirates). During the intervening 5,000 years, insurance products have become more sophisticated, but underwriting has remained at its core.

This raises two questions: What is underwriting, anyway? And how does it affect you?

“Underwriting is evaluation of risk,” says Laura Boylan, Haven Life’s head of underwriting services. Essentially, an insurance underwriter assesses the riskiness of an applicant, determines whether their company should insure that person, at what price, and for what amount of coverage. “This is true for all kinds of insurance,” says Laura, including home, where the “risk” would be damage to a property; auto (damage to a vehicle); and, of course, life insurance, where the thing underwriters call “risk” is usually referred to as “death” by the rest of us.

While the idea is simple (evaluate risk, attach a price to it), the risk assessment and underwriting process has become especially complex in recent decades. As with an auto or mortgage underwriting process, life insurance underwriting is based on a few factors. The modern life insurance policy began with the industrial revolution in the 1800s, but the underwriting process was fairly basic until the 1940s. Until then, insurance premiums were based entirely on age. After that, insurers started considering gender, too (male mortality rates are generally higher than female rates).. With the advent of more technology and more data from the second half of the 20th century onwards, however, the range of factors which insurers consider has expanded, as has their ability to consider them in detail.