Insurance Underwriter – Definition

Cite this article as:"Insurance Underwriter – Definition," in The Business Professor, updated November 26, 2019, last accessed October 24, 2020,


Insurance Underwriter Definition

An insurance underwriter is a professional in the insurance industry who evaluates the risk involved in insuring individuals and analyze the risks of covering assets. Insurance underwriters use their analysis to create prices for each insurance plan, and they tailor these prices to the insurable risk. In the insurance industry, underwriting refers to the acceptance of remuneration for the willingness and ability to cover a possible risk. In calculating these risks, underwriters make use of different software and tools, as well as actuarial data to determine the possibility of risk and the degree to which it can happen for a particular potential client.

Important Details

  • An insurance underwriter is in charge of evaluating the risks that are involved in insuring people and properties, as well as set up insurance prices according to the degree of risk involved.
  • In investment banking, an underwriter refers to an individual employee who evaluates and set up minimum prices for shares and stock prices for a firm in an initial price offering (IPO).
  • Underwriters in the commercial banking sector are in charge of analyzing the risk involved in lending to a client. They also engage in the calculation of interest rates on loaned amounts and these rates are generally fixed based on the risk undertaken.
  • Insurance underwriters take responsibility for future risks and thus, they charge insurance premiums in return to cover up for such risks in case damage occurs or something else happens.

A Little More on What are Underwriters in Investment Banking

Investment banking underwriters usually work in investment banks that help in the Initial Public Offering (IPO) process of a firm about to become publicly-traded. These banks can choose to purchase shares with the aim of selling them off to other individuals or entities at a higher price. However, if the performance of the company declines over the years, these banks are either required to sell them at a lower price and take a loss, or hold them at their own peril and not that of the company which owns the shares. In a situation where the shares are in high demand, the investment bank can choose to sell their part at a higher price, thus raking in profits for them. For instance, say Bank CX bought 30,000 units of Company PB’s shares at $60 per unit when it launched an IPO, and now the price of the share has skyrocketed to $600 per unit in a period of five years. In this case, there’s a possibility that demand will be high, and if Bank CX wishes to share their 30,000 units at $600 each, they can make up to $18million excluding the cost involved in acquiring such shares.

A Little More on What are Insurance Underwriters

In the insurance sector, underwriters assume the risk that a contract or individual or any other entity carries. For instance, an underwriter can choose to assume the risk of a water damage inside a property, and thus charge a certain monthly premium for such risk. For an underwriter, it is very important to evaluate the risk of the client before assuming them and also before the policy period and the period of renewal. This way, they get to save themselves from unnecessary charges in case of unprecedented damages.

For instance, a homeowner’s insurance underwriter is required to consider different variables and factors when rating a company policy. Field underwriters are mainly in charge of property and casualty insurance, and they carry out inspection on assets or homes for leaking or damaged roofs, dead or almost dead trees, deterioration in the state of the building’s foundation, and many other factors. In some cases, homeowner’s insurance underwriters can include hazards that are likely to trigger liability claims. These hazards might include; weal fencing, swimming pool safety, cracked walls, and any other related issue. The insurance firm basically considers these factors to be risks, as they might trigger liability claims in events of drowning, falls, and slips.

Homeowner’s insurance underwriters usually have a large number of factors to consider when picking a price for an insurance monthly. In most cases, the credit rating of the applicant is considered and analyses using algorithmic data. The system further produces an accurate premium cost based on what the insurance company thinks about all associated risks with the property or entity being insured, as well as from the reports of the field underwriter. Clients’ answers or responses to lead underwriters at the time of their application also affects the monthly premium.

Insurance companies are required to balance their underwriting approach as too much aggression in creating a premium can affect earnings negatively, and too conservativeness in creating premiums might lead them to losing out to their competitors.

A Little More on What are Commercial Banking Underwriters

In commercial banking, underwriters mostly focus on evaluating the risk involved in borrowing out money to a client. These underwriters analyze the credit rating of the applicant, and use it to determine if they’re eligible to receive funding or loans. The borrower in most cases is required to pay a mandatory fee to cover the risk of the lender in a case where he or she defaults.

A Little More on What are Medical Stop-Loss Underwriters

Medical stop-loss underwriters evaluate risk on behalf of the health of a self-insured employer groups. In stop-loss insurance, the groups which make payment for employees are protected. This means that they’re not required to pay premiums to transfer risk to the insurance carrier.

Self insured entities pay medical and drug claims in addition to administration fees and these payments are made from the company’s reserves. In this case, the company accounts or takes responsibility for the health of its employees, as long as the issue is a work-related case. Underwriters that work for self-insured entities are thus required to individually analyze the health condition of each employee in the firm. Underwriters also assess and analyze the risk of the group as a single entity and compute the appropriate or accurate premium level and claim limits. It these claim limits are exceeded, it can cause drastic harm to the employer.

Extra Point: According to Business Insider, Warren Buffett utilized insurance and reinsurance premiums to finance investments at Berkshire Hathaway. This proves that insurance underwriting is a very profitable industry.

References for “Insurance Underwriter › Personal Finance › Insurance › Glossary › Insurance 101 › What is underwriting? › Definitions › Economy

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