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Underwriting: The Rules of Auto Insurance

Written by W. Lane Startin. Posted in Definitions, Research Last Updated: 08/18/2011

What underwriting is, why statistics drive it, how computerized underwriting streamlines the auto insurance buying process, and why underwriting fosters auto insurance competition.

Let computers do the underwriting. Life is less stressful. Really.

As with everything else, auto insurance has rules. One has to follow those rules in order to get the right policy issued to the right driver and the right vehicle to ensure both proper coverage and to keep the insurance company in the black at the same time.

But what are the rules?

This is a question that can confound even the sharpest of minds. Fortunately there is a method to know how the game is played: underwriting.

In a general sense, underwriting refers to the qualifying and pricing rules insurance goes by. Underwriters work in all forms of insurance: homeowners insurance, life insurance, renter’s insurance, commercial general liability insurance, you name it.

For auto insurance underwriting is dependent on literally thousands of variables regarding the auto, the driver and the conditions the auto is driven under, such as miles driven to work each day. All of these factors and more can not only determine if the auto and driver qualify for a policy to begin with, but also how much the premium will be.

Statistics Rule in Underwriting

Auto insurance underwriting is driven by statistics. The basic premise behind auto insurance pricing is that groups which cause the most accidents should pay the most in premium, while safer groups should pay less.

These experiences vary from company to company, but for the most part insurance companies agree that teenage drivers cost more than their older counterparts. Also,  Women are slightly less expensive to insure than men and people with tickets and claims cost more to insure than those with clean records. Insurance companies employ actuaries to crunch the numbers and back these claims up with hard facts.

Underwriting Goes Digital

Despite often complex variables, many auto insurance carriers are moving away from human underwriters and relying more and more on automated underwriting to allow for quicker policy issuance. In the past agents temporarily bound coverage when an application was written with final approval, or policy issuance, coming only when the policy was approved by an underwriter at the home office.

Today many auto insurance companies will issue a policy on the spot thanks to computerized underwriting systems, sending an application to an underwriter at home office only if a particularly unusual circumstance is encountered.

Computerized auto insurance underwriting takes the guesswork out of auto insurance applications, which saves both insurance agents and customers a lot of grief. Customers know that their policy is issued and in force before they walk out the agent’s office, and agents don’t have to go back days or even weeks later to tell a customer their policy was turned down by underwriting, something agents dread more than just about anything in the business. If there are problems, it’s known right away.

Different Companies Use Different Underwriting

Not all insurance companies are created equal, and some companies look at the business with very different mindsets. For example, a standard insurance company will underwrite very differently than a high-risk insurance company, and a specialty car insurance company will underwrite even more differently than their mainstream counterparts.

This is why price can vary widely for the same driver and the same car from company to company; different companies consider different things in their underwriting. Because underwriting is by no means uniform across the industry, it pays to shop around.

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W. Lane Startin

Lane is a former insurance agent with two well-known and highly rated companies. He left the world of insurance sales to return to his first love, writing. He enjoys helping people unravel the intricacies of insurance without the bias created by working for commission. He’s a graduate of Idaho State University and by extension a long-suffering Bengals fan. Lane blogs at Car Insurance Guidebook.

Reviews (2)

  • Teri Barraco

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    I just had a question. An auto salesman told me that insurance companies like Progressive do not underwrite their auto insurance. Is that true? And if so what does that mean?

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    • Michele Griffin

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      The underwriters in an insurance company are the ones that approve whether or not the insurance company wants to provide insurance for a particular driver. So, when company “underwrites” someone, it means that they have decided to provide insurance to that person.

      If an insurance company does not underwrite their own insurance, they are not an insurance company; they are more of an insurance agent.

      Reply

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