If an insurance broker is the public face of the insurance business, the insurance underwriter is the guy behind the scenes. Just like a stage play or television set needs someone to hang the lights and make sure the cameras are pointed in the right direction, an insurance company needs someone to determine risk and make the assessments that will guide their decisions.
The purpose of insurance is to transfer risk from the insured to the insurance company. Individuals don’t want to bear the weight of every potential risk to their home or livelihood all on their own. They want assurances that they’ll be protected from losing everything in the case of a fire, theft, or injury. Insurance companies take-on that risk in exchange for a premium. Makes sense, right?
But how do insurance companies decide what kind of risks they’ll take-on? How do they decide how much premium to charge for one risk over another?
That’s where insurance underwriters come in. Underwriters are the experts who evaluate risk on behalf of an insurance company. If someone wants to get flood insurance for example, they look at the likelihood of a flood in that area and determine the exact risk of it happening. Based on that assessment, they accept the responsibility of being responsible for flood damage and set the premium that should be charged.
In very simplified terms, you could say that underwriters are gamblers. They play the odds and choose when to wager on a bet and when to walk away. But this isn’t a haphazard role. Just like how a professional poker player will take in all the info available on the table and make educated predictions on the outcome, the underwriter assesses risk based on a massive collection of data and previous outcomes.
Underwriters look at statistical models that break down the odds in tangible ways. They compare previous similar cases against new ones and use that information to project into the future. But it isn’t all analysis either. Underwriters are trusted to make judgment calls in unique scenarios when necessary. A broker will often negotiate with an underwriter to make an exception for a client with a particularly good track record, or to find a better rate based on previous positive interactions.
To become an underwriter, a bachelor’s degree or better is generally required, and experience in related fields helps. Successful underwriters need to be able to understand and translate complex technical information, possess communication skills, and a strong objective outlook. Determining risk accurately requires a cool and collected mind that is able to weigh information on its’ own merits.
The term “underwriter” comes from the origin of the profession. Back in the 1600’s insurers at Lloyd’s of London would determine risk for various ventures and propositions, often ship voyages and other endeavors that required large amounts of capital. In the agreement, they would literally write their own name under the risk section of the contract, indicating that they knowingly acknowledged and accepted the risk of the deal.
Underwriters might not literally write their own name on a contract anymore, but the general idea remains the same. Assessing risk, making good judgment calls, and understanding the stakes at play define the life of an underwriter.