Underwriting is the process of assessing and classifying risk to determine whether to offer coverage, on what terms, and at what premium. For A&S insurance, the underwriter evaluates three broad dimensions.
Medical risk: the applicant's health history is the primary underwriting factor. The underwriter reviews the application, attending physician statements (if ordered), and, for large face amounts, paramedical examination results. Factors that increase medical risk include prior diagnoses of chronic conditions, recent hospitalizations, surgeries, ongoing treatment, family history of hereditary conditions, and current medications.
Occupational risk: some occupations carry higher risk of disability or health claims. Underwriters classify occupations into risk categories (commonly designated by letters or numbers, e.g., "Class A" for office professionals to "Class D" for manual labourers with machinery). The occupational class affects premium, policy terms, and the definition of disability available.
Financial underwriting: the insurer will not issue more coverage than the applicant's financial need justifies. For disability income, the insurer cross-references the applicant's earned income and existing disability coverage to ensure the total benefit does not exceed the all-source maximum (typically 70 to 85 percent of pre-disability income). Over-insurance creates a moral hazard.
Underwriting outcomes:
- Standard issue: the risk is accepted at standard rates.
- Rated (substandard) issue: the risk is accepted but at a higher premium reflecting the elevated risk.
- Exclusion rider: the policy is issued with a rider excluding a specific condition or body part from coverage. For example, a prior knee injury may be excluded.
- Postponement: coverage is deferred pending resolution of a current medical situation (e.g., pending a diagnosis or post-surgery recovery).
- Decline: the risk is not acceptable on any terms.
Exam application: a question may describe an applicant with a pre-existing back condition. The likely underwriting outcome is either a rated policy, an exclusion rider on spinal conditions, or a decline depending on severity. The advisor must explain these possible outcomes honestly to the client at the application stage.