The Science of Insurance Underwriting

The world of insurance underwriting can feel like a black box, complex and often misunderstood. Whether you’re applying for life, health, auto, or home insurance, the process may seem straightforward on the surface, but there’s much more going on behind the scenes.

Here’s what it usually looks like:

1. You provide personal or property information
2. You wait 24-48 hours
3. The insurance company responds with your coverage details and premiums

At the heart of underwriting is actuarial science, a discipline that applies mathematics, statistics, and financial theory to evaluate and manage risk. Simply put, underwriting determines whether or not someone is approved for insurance, and actuarial science determines how much that coverage will cost.

Key Factors in Insurance Underwriting

While the specifics vary by type of insurance, the general framework for underwriting remains consistent across industry. Here are some of the most common factors insurers evaluate before issuing a policy:

1. Risk Profile

Insurance companies are among the biggest gamblers in the world. Every policy is essentially a bet on risk, and underwriters rely on historical data to assess the likelihood that a person or property will experience an event that leads to a claim.

Here’s how risk is assessed across different types of insurance:

• Life Insurance: Age, gender, medical history, occupation and lifestyle choices (e.g., smoking, alcohol consumption)
• Health Insurance: Pre-existing conditions, prescription drug use, frequency of medical visits, and body mass index (BMI)
• Auto Insurance: Driving record, age, location, and vehicle type
• Homeowners Insurance: Condition of the home, year built, and geographic risk factors (e.g., flooding, wildfires, earthquakes)

2. Credit Scores

Across all types of insurance, companies use a specialized credit-based insurance score to help assess risk. While this score isn’t always identical to your FICO score, it’s based on similar financial data.

Research shows that individuals with higher credit scores tend to be lower risk, they’re statistically less likely to file claims. These scores offer insurers a more nuanced view of an individual’s financial behavior, which can be a strong indicator of how likely someone is to file a claim. A higher score suggests responsible money management (like paying bills on time), while a lower score may point to greater risk.

3. Claims History

Insurance companies track and share claims data through industry databases like the CLUE (Comprehensive Loss Underwriting Exchange) report. This shared information helps insurers assess how often an applicant has filed claims in the past. By working together, insurers can better manage risk and set more accurate premiums based on an individual’s claims history.

4. Income and Employment Stability

Insurers rely on consistent premium payments to remain profitable, so an applicant’s income and employment history are important underwriting considerations. A stable employment history suggests reliability and financial responsibility, while frequent job changes, employment gaps, or inconsistent income may signal higher risk and can negatively impact underwriting decisions.

5. Technology

Over the last several years, underwriting has been transformed by advances in artificial intelligence (AI) and machine learning. These technologies allow insurers to analyze vast amounts of data quickly and make faster, more accurate underwriting decisions. They also enable more personalized pricing, which can lead to fairer outcomes since machines, unlike humans, do not carry personal biases (at least not yet).

Insurance underwriting might seem mysterious, but at its core, it’s a process of evaluating risk – one that’s increasingly powered by modern technology. Understanding the factors that influence underwriting decisions can help consumers make smarter choices, improve their risk profiles, and advocate for themselves in a data driven system.

So, the next time you’re quoted a premium that doesn’t seem fair, remember it might just be the algorithm doing the math.

Disclosures:

Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. A copy of Apella’s current written disclosure brochure filed with the SEC which discusses among other things, Apella’s business practices, services and fees, is available through the SEC's website at: www.adviserinfo.sec.gov. No current or prospective client should assume any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice.

Apella Wealth does not sell commission-based insurance products.  The firm does work with clients through the financial planning process to identify potential gaps in insurance coverage and may facilitate placement of insurance at client direction.