Life insurance companies are expected to be meticulous with the risk classification as they deal with public monies. The underwriting tools play a pivotal role in placing the risks appropriately. This article discusses in depth the underwriting intricacies in life insurance and the challenges being faced by the underwriters.
The business of life insurance companies is one that is replete with acceptance of risks, some of which are very large. Insurance companies hence use the underwriting tool to place these risks where they really belong. For someone who is viewing it from outside, insurance might look like just another way of business, resulting in huge profits. But, the business itself is one of risk assumption and accordingly it is not roses all the way. In order to weigh the risks before accepting them, the insurer undertakes the exercise of underwriting all the proposals at his disposal to decide whether to accept the risk or not; and if yes, at what rates and terms it should be accepted. Thus, there is an element of selection and classification that goes into the process of underwriting.
Each of the classes into which every risk has to be placed represents a homogenous combination of individuals, thereby necessitating an equitable premium commensurate with the risk profile of the group. It is the underwriter's duty to identify the particular risk group into which each of the proponents belongs. While it would be ideal to have as many of such groups as possible, maintaining a large number of groups would be a tremendous strain on administration. Further, adopting over-exacting methods in classifying a particular risk would amount to poor marketing strategy, especially in a competitive landscape. Thus, the underwriter has to maintain a delicate balance while analyzing and classifying each risk. While there are several objective methods of accomplishing this delicate balance, it is not as simple as it might look and the whole process is interwoven with several intriguing challenges.
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