The term for underwriting in the insurance industry is called Reinsurance.
Reinsurance is a form of insurance bought by an insurance company to spread the risk of a potential large loss. A little like a betting shop will spread the risk if they have too much exposure on a favourite horse in a race. The betting shop will lay bets on the race with other bookmakers so if the horse does win, they have more money to pay out to the winners. Essentially, reinsurance can protect the insurer from financial ruin and therefore ensure the customer gets paid should they make a claim.
A portion of the premium received from a paying customer for insurance by the insurance company will be spent to purchase a reinsurance contract that will pay out in the event of an exceptionally large loss.
Reinsurance is a large and complex industry and Insurers are legally required to have sufficient capital in reserves to pay all potential claims related to the policies which customers have bought.
The two main types of reinsurance are Treaty and Faculative.
Treaty Reinsurance covers all or a portion of an insurer’s risk and is effective for a certain time period and Facultative Reinsurance insures against a specific risk factor.
How do insurance companies make money?
Insurance companies revenue models vary among the different factors and assets of insurance whether it be health, property, and/or financial guarantors. Any insurer will always asses risk at the beginning of a policy, understand what is needed and then usually charge a premium for assuming it.
How do insurance companies’ asses risk?
Let us put it this way, suppose an insurance company is offering a policy which offers a £100,000 conditional payout. The company needs to assess how likely a prospective buyer is to trigger the conditional payment and extend that risk based on the length of the policy.
Why is insurance underwriting so important?
This is where and why insurance policy underwriting is absolutely critical. Without comprehensive policy underwriting, the potential for insurance companies to charge some customers too much and others too little for assuming risk would be high. Therefore, if an insurance company costs and prices its risk element effectively, the insurance company should bring in more revenue in upfront premiums than it spends on annual conditional payouts and this is when an insurance company becomes successful.
When a customer files a claim, the insurance company must process it. Firstly, they will check the claim for accuracy, and only then, if the claim be successful will they submit the payment. This adjusting process is necessary to filter out any fraudulent claims and minimise risk of monetary loss to the company.