How car insurance underwriting works

Car insurance underwriting is the heart of auto insurance, with the underwriters acting as the invisible force behind insurance companies. Underwriters are responsible for assessing a person’s risk before approving a car insurance company’s policy.

Insurance underwriters assess risk by collecting as much information from the customer as possible and analyzing it.

What is risk assessment?

Risk assessment – categorizing customers by their risk level – is critical for both the underwriter and the car insurance company. If the underwriter accidentally classifies a customer as low-risk and offers that person a low premium only to have him then make a large claim, the underwriter could lose a lot of money. Similarly, if the underwriter accidentally classifies a customer as high-risk and offers him too-high of a premium, the customer will refuse to buy insurance and look for another car insurance company.

In order to assess risk, underwriters for car insurance need to look at a few factors relevant to the driver and the type of car driven. Thankfully underwriters have a lot of data at their disposal which can be analyzed to determine risk. Data required by car insurance underwriters includes:

• Age

• Gender

• Driving history including any driver’s education courses

• Marital status

• Place of residence

• Type and year of car

• Whether the car is leased or owned

• Where the car will be parked (garage, street)

Luckily, for consumers and insurance companies, underwriters have created risk assessment models to make the process go a lot faster. In the past underwriters had to analyze customer’s data individually or through meticulously combing through actuarial tables. Today, software analyzes the data and can underwrite almost instantaneously.

Faster car insurance underwriting

The speed at which car insurance can be underwritten has led to large growth in the car insurance industry. Today, car insurance brokers are able to offer customers a quote and sign them up within an hour, changing the job of a broker to something of a customer service role. The benefit for customers is two-fold. First, customers can get insurance quotes almost immediately and use those quotes to shop around. Second, with pre-determined models and software, insurance underwriting is less time-consuming and less costly than in the past, which means greater savings for the customer.

Unfortunately, the underwriting process does include some unfair groupings. Unmarried men under 25 pay the highest car insurance rates simply because the data says they are the most likely to make a claim. Similarly, an elderly woman who has had insurance for 40 years might pay a tiny car insurance premium because, statistically, she’s unlikely to make car insurance claims.

Insurance brokers love to throw the word “underwriting” around. For a customer with little knowledge of the car insurance industry the term can seem daunting. What, exactly, is who writing under where? Fortunately, car insurance underwriting isn’t as complicated as it sounds. Simply put, it’s a software that analyzes how risky a person is using data and statistics. The riskier the person seems, the more they’ll pay.