What is underwriting and how does it work?

Most Kiwis have insurance but many don’t understand what underwriting. And fair enough - it can be confusing!

If you understand underwriting, just like other commonly used insurance terms, you’ll have a stronger grasp on how your insurance policy works, how your insurance premiums are set and how the wider insurance industry operates.

So let's dig in - and hopefully after this short read, you'll understand a bit more about what underwriting is all about.

What is underwriting exactly? 

Underwriting refers to the process of assessing an individual’s circumstances and the likelihood of an insurance event of an accident occurring.

Sharron Botica, who's the Chief Customer & Digital Officer at AIA New Zealand, says it’s all about gaining an understanding of the person being insured.

“When you apply for insurance cover, we don’t know whether you will need to make a claim in the future," she says.

"However there are a number of factors an underwriter can consider to help them determine how likely they think it is, and therefore how much you personally should pay to be covered. This process is known as underwriting.”

In a nutshell, underwriting is a process of assessing risk and acting accordingly.

It’s really about fairness, Sharron says.

“It means as an insurer we can operate in a fair and financially sustainable manner for the long-term benefit of all our customers. We do this by ensuring that as a customer you pay a premium and receive insurance cover that is proportionate to the risk you present.”

What questions might an underwriter ask? 

An underwriter works to understand the level of risk each customer presents so that they can provide insurance at a fair price for everyone.

To do this they may ask questions such as:

• Should extra premiums be charged or exclusions applied for previous medical conditions? You may be more likely to need to claim for these in the future.
• Are there adjustments needed for occupations? Some jobs are higher risk than others. 
• Are there adjustments for pursuits and pastimes? For example, insurers might charge extra premiums or apply an exclusion if you regularly take part in extreme sports which therefore increase your likelihood of needing to make a claim.

Your insurer might also introduce restrictions based on financial information or travel – such as an exclusion to visit “unsafe” countries. Most insurers currently deny cover for trips to countries with SafeTravel ‘Do not travel’ warnings. 

How does underwriting work?

As an example to illustrate how underwriting works, let’s say a budding mountaineer was planning on climbing Mt Everest. This would come with an additional level of risk of injury or death than what the average person might not experience.

This increased risk could unfairly increase the cost of insurance for other customers (ones who don't regularly engage in such risky activities!) To ensure this doesn’t happen, the insurer would access specialised information to adjust the terms and conditions for specific customers like our mountain climber. In this case, the insurer may offer a higher premium to reflect the increased risk of death, or an exclusion for mountaineering.

Sharron says this way of assessing risk and adjusting policies makes insurance accessible for everyone:

“The process of underwriting ensures balance across all customers and ensures that we charge the right price for future risks. It also means that premiums are kept low enough so that a large number of people can participate and receive cover, ensuring the greatest level of affordability.”

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