Underwriting risk is the potential for economic loss an insurance company could experience by providing coverage. The company measures the probability of payout through the underwriting risk assessment process, which determines the probability and severity of potential loss. The insurance company assumes the risk of economic loss in exchange for insurance premiums.
Underwriting risk is the potential for economic loss that an insurance company could experience if it agrees to provide coverage to an individual or organization. It can also refer to a specific set of named hazards or to broader general coverage. An insurance company measures the probability of an insurance payout through the underwriting risk assessment process.
One way an organization might try to manage its risk of economic loss is to share the risk with an insurance company. In exchange for insurance premiums, the insurance company assumes the risk of economic loss. To determine the amount of a premium to be charged to the organization, the insurance company underwrites. Insurance underwriting is the process by which an insurance company determines the probability and severity of a potential loss: underwriting risk.
Underwriting risk is determined by exposure to certain hazards and hazards. An underwriting hazard is something that directly causes economic loss. A hazard is a situation that exists that makes the loss of a hazard more likely. For example, if an organization seeks to insure a building it owns against damage, potential risks may include fire, wind, and flooding. Risks would include if flammable material is stored in the building, if the building is located in an area with a high risk of wind or flood damage, or if it is poorly constructed.
When the insurance company analyzes underwriting risk, it would look at factors such as the age of the building and its electrical wiring, the materials it is constructed of, its proximity to a fire hydrant and fire station, and whether the building meets certain standards for fire or wind resistance. When those factors are measured, the company can formulate a cost that it would need to collect from the organization to be willing to accept underwriting risk. This cost is called the insurance premium. Underwriting risk is the total amount for which the insurance company is responsible in case of loss. If the organization suffers an insured loss and the insurance company is responsible for indemnifying the organization, the reimbursement is called an insurance payout.
An insurance company determines its underwriting risk not only on a case-by-case basis, but also by examining a pool of risks. When risks are pooled, only a small number of underwriting risks are more likely to result in losses for the insurance company. If the insurance company does effective underwriting work, it will collect more in insurance premiums than it will pay out in claims.
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