Underwriting

In the process of underwriting, an insurance company essentially decides for what risks it will offer policies and for what premiums. Premiums or policy fees are set at a rate commensurate with the degree of risk associated with the type of policy offered.

Insurance companies invest premiums to ensure the presence of available funds to pay out claims on the benefits provided for in the terms of the policy. These benefits serve as compensation for a loss such as extensive damage to a home or compensation for a service received as in the instance of health insurance.

A wide range of data and mathematical risk assessment models are employed by the industry to determine the likelihood of claims being filed on given activities and events according to the principles of actuarial science. Essentially then, all insurance underwriting takes place according to risk evaluation with higher premiums assessed for higher risks and some activities or situations being considered too risky to insure.

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