Underwriting is the process of measuring the level of risk that an applicant presents to the insurer. In the health insurance industry, underwriting allows insurers to distinguish between applicants who present a standard risk and those who present a substandard risk. Underwriting allows insurance companies to calculate health insurance costs. The underwriting process varies from one insurance company to another, which means that you may receive more affordable rates from one company than another, based on its underwriting.

Underwriters use several resources to determine an applicant's risk level. The initial application is a vital source of data. With the applicant's permission, an underwriter may access medical records to verify information in the application and to estimate the probability that the applicant will require non-routine care. The underwriter may also utilize inspection reports, which reflect an applicant's financial history, and reports from the Medical Insurance Bureau, which maintains information on insurance applicants who have applied for coverage elsewhere.

Goals of the Underwriting Process

The primary goal of underwriting, from an insurer's perspective, is to calculate the amount of risk that an applicant presents, or the likelihood that the insurer will be required to pay for medical care. An applicant's risk level may be based on age, Body Mass Index, current health condition, pre-existing health conditions, occupation, hobbies and smoking status. Insurance companies use these factors to determine how much to charge an applicant for health insurance coverage. In cases where the risk is considered too high, an applicant may be denied for coverage.

One of the goals of underwriting is to ensure that an insurance company's pool of policyholders does not include a large percentage of people who present a high level of risk. For example, in a group of 10,000 policyholders, only a small percentage should have potentially serious medical conditions or high risk occupations, or the risk to the insurer is too great. Underwriting protects the insurance company's financial interests by maintaining a profitable balance between the number of low risk policyholders and the number of high risk members.

Underwriting can filter out applicants who are providing fraudulent information in order to obtain coverage. If an applicant falsifies information in a health insurance application, the underwriter may find conflicting details in the medical records. Records from the Medical Insurance Bureau may also alert the underwriter to the possibility that an applicant has misrepresented personal health data.

Insurance Applications and Underwriting

The health insurance application is one of the most important components of the underwriting process. Although each insurance company has its own application, these documents have basic sections in common. A standard application requests personal data, such as name, date of birth, gender, contact details and Social Security Number. A second section requests information about the applicant's height and weight, current and past medical condition, smoking and tobacco use, occupation and hobbies.

The agent or broker who oversees the application must provide an agent's statement. The agent participates in the underwriting process by communicating directly with the applicant, observing the applicant's behavior and demeanor and collecting other information that might point to the applicant's credibility. Finally, the applicant confirms that the information provided is accurate and true by signing the document.

Underwriters use the tools at their disposal to verify the information in the application and determine the applicant's level of risk. The underwriting process often makes the difference between whether an application is accepted or denied. Because underwriting procedures can vary from one provider to another, it pays to apply for coverage from more than one insurance company if you are turned down or offered an unreasonably high quote.