Glossary

Underwriting is the process of determining whether to accept a risk and, if so, what amount of insurance the company will write on the acceptable risk and at what rate. Underwriters are companies, individuals, or insurance companies that carry on this critical activity for their own account or for that of others.

An underwriting agency is delegated the underwriting and policy writing authority by an insurer. This authority actually allows an agent to price and issue the physical policy to the insured. In return for this additional administrative work, the agency normally receives increased commissions from the insurer involved.

The underwriting capacity is the amount of risk assumption and/or retention ability of an insurer, or of the insurance industry as a whole, which is determined by the amount of surplus.

Underwriting cash flow is the net collected premiums (net of reinsurance premiums) less losses, loss adjustment expenses, and underwriting expenses paid.

All risks with a specified risk profile—for example, age, location, and occupation—are called an underwriting class. Risks are classified using characteristics likely to produce the same or similar loss experience for each risk over time.

Underwriting expense is the cost incurred by an insurer when deciding whether to accept or decline a risk. It may also include meetings with the insureds or brokers, actuarial review of loss history, or physical inspections of exposures. The term can also refer to expenses deducted from insurance company revenues (including incurred losses and acquisition costs) to determine underwriting profit.

Underwriting guidelines establish the set of rules and requirements an insurer provides for its agents and underwriters. The underwriter uses these guidelines to make decisions regarding the acceptance, modification, or rejection of a prospective insured.

The underwriting manager is primarily responsible for achieving an underwriting profit for the insurer at the local level. This person has operational as well as functional responsibilities. They are responsible for setting local underwriting policy based on various profit considerations. In surplus lines, an underwriting manager is often referred to as a managing general underwriter and acts on behalf of one specific insurer, assuming the role of an on-site branch office for the insurer. They have broad authority to bind insurance and settle claims. Their clients can be retail brokers, wholesale brokers, or managing general agents.

An underwriting member is person elected to underwriting membership of Lloyd's of London and subscribing to Lloyd's policies issued in accordance with the United Kingdom Insurance Companies' Acts and complying with the regulations for membership as laid down by the Committee of Lloyd's.

The underwriting period is a limited time period at the beginning of a new policy when the insurer may gather the necessary information about an applicant and make a final decision on that applicant's acceptability. During this time period (typically 30 to 90 days, depending on the line of business and the state where the risk is located), the insurer is free to cancel the policy for any legal reason. Once this time period has passed, then the insurer is limited in the reasons for which it may cancel the policy.