I spent time visiting with my father this week while he recuperates from knee replacement surgery. After we caught up on the grandchildren – one of his favorite topics! – he asked me about this week’s blog topic. I told him I was thinking about underwriting,but I wasn’t sure it would be all that interesting. After all, why would the consumer be interested in underwriting when it is for the benefit of the insurance company? Well, maybe that wasn’t the question to pose to a retired insurance man! Or, maybe it was! Having been employed with Erie Insurance for 20 years and then having spent another 20 as the owner of an independent insurance agency, posing that simple question to my dad sparked the following response:
The origin of underwriting has beginnings in the early days of the sailing ships – when merchants did not want to assume the total risk of sending their merchandise by ship and then lose everything if those ships ran into problems. So, they found people who were willing – for a fee – to reimburse the merchant should his cargo not reach its destination. This agreement was consummated by the insurer signing his name under the manifest… hence the name underwriting.
Over the years, insurance companies were formed. Through their statistics and experience, they were able to refine their exposures to loss. They are now able to predict that a certain number of people in a certain classification will be most likely to have a claim. Though they can’t predict which people will have a claim, they can predict the number of people who will have a claim.
The basic theory of insurance is that the losses of a few are spread over the pocket books of many. In other words, the small contribution of many people who do not have claims enables those who do have claims to be paid – thus avoiding a catastrophic loss.
The experience of insurance companies over the years, coupled with the fact there is the aforementioned predictability, allows the company to determine the best rate for people less likely to have accidents – and that is where underwriting becomes important. Since this is the type of risk the insurance company likes to attract, the result is a beneficial rate for the people in that classification. Therefore, underwriting is important to both the company and the insured!!!