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The mystery of underwriting – what exactly is it?

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The mystery of underwriting – what exactly is it?

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You may have heard the term ‘underwriting’ at one point or another. In the context of insurance, this is one of the oldest and most important concepts.

The term came out of Lloyd’s of London, (one of the oldest insurance houses) in the late 1600s. This was largely for insurance on marine voyages to the Americas and other parts of the world. Back then, ‘insurers’ would sign at the bottom of a document that listed the cargo in a ship (literally, UNDER | WRITE). They would do so indicating the share of the cargo they were insuring.

In more recent times, the term has evolved to describe a similar but slightly different process…

What is it?

Underwriting is a process that insurers use to assess the risk of providing insurance to you.

Side note: Risk, in this case, is the chance that the insurer will lose money by covering you.

The risk determines the price(called the premium) that is charged for the insurance cover. They have the right to refuse cover if they believe that covering you presents too much risk.

Underwriting is done at various points in time. A common example is when you initially take out life insurance; you may have to take some medical tests. This forms part of the insurer’s risk analysis to determine the premium it will charge and whether or not it will give you cover. The insurer may also choose to cover you with some extra terms and conditions, based on the results.

Let us take a deeper look at this.

Medical underwriting

Generally, you would have to go for blood tests and complete a form of your medical history. You may also have to get a medical report from a doctor. This will be the case if you have specific medical conditions at the time of taking out the insurance cover.

Where people are of good health the process is often quite quick.

Also as part of the process, the insurer may ask if you conduct any “dangerous” activities as a hobby. Activities such as rock climbing, sky diving, race driving amongst many others. That may also impact on the analysis of the risk that the insurer looks into.

How you should respond to this whole process

Insurance is a necessity rather than a luxury. Always follow through on underwriting requirements when looking to take out insurance cover. Do not let the underwriting requirements stop you from proceeding with taking insurance.

Some of the decisions that may arise from underwriting are:

  1. Accepted at standard rates. The insurer is satisfied that there are no extra risks posed if they offer the insurance cover to you. They are happy to offer you the cover at the standard insurance rates.
  2. Premium loading. This is when the insurer feels that there may be a higher than normal risk in providing you with the cover. Instead of charging you standard rates they charge you standard rates + an addition. Example: a healthy person with low risk would have paid R10 for the same cover that you will pay R12 for. The extra cost is due to the higher underwriting/medical risk.
  3. Exclusions – there may be certain conditions that they are not willing to cover. This will be based on the medical evidence provided. The insurer then provides you with insurance cover on most conditions. This is done at standard rates. Certain conditions are excluded in totality. An example is if you have serious back problems. The underwriter may exclude cover for anything related to the back. Should any claim occur due to the back being the problem, they will not pay for that insurance cover.
  4. Decline cover – this is the most drastic of the lot. This is when an insurer is of the view that the risk of providing you with cover is just too much of a risk to them as a business. They will not offer you any cover what so ever. They are not willing to take the risks associated with providing you such cover.

Please consult your financial adviser when taking out insurance. They can guide you through the underwriting process and help you to understand it better.

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Shameer Chothia is currently an Employee Benefits Consultant at Momentum Consultant and Actuaries. He is the chairman of the Rhine Stone Body Corporate and the Founder and Head Financial Coach at LMS Financial Coaching. Shameer is deeply passionate about financial literacy and education. He truly believes that there is duty to empower people with education, which makes a difference in their everyday lives. To achieve this, he founded LMS, actively changing lives by empowering people with financial knowledge

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