Underwriting, Construction, and Rates

The Underwriting Process and Information Sources

Underwriting is the process of selecting, classifying, and rating risks for insurance coverage. The primary goal of underwriting is to guard against adverse selection and produce a profitable book of business. Adverse selection is the tendency of individuals with a higher-than-average probability of loss to apply for or continue insurance coverage. By carefully assessing each applicant, an underwriter decides whether to accept the submission, decline it, or attach specific terms and pricing.

The insurance application serves as the primary source of underwriting information about the applicant and the insured property. It contains statements about the applicant and property that underwriters use to assess risk, and the applicant generally signs or otherwise verifies those statements. To confirm the details provided, an underwriter may order inspections by the insurer or a third-party inspector. These physical inspections help verify a building's condition and maintenance. In addition, underwriters can examine public records, such as building permits and property records, to gain further insight into the property's history.

Underwriters also rely on third-party databases and credit evaluations. The Comprehensive Loss Underwriting Exchange, known as CLUE, provides a database of prior property loss history for individuals and properties. For commercial applicants, business credit reports from services such as Dun & Bradstreet can help underwriters evaluate an applicant's financial condition. By contrast, organizations like AM Best primarily rate insurers rather than insurance applicants. Consumer reporting agencies provide credit reports and personal background reports under the rules of the federal Fair Credit Reporting Act.

Credit-based insurance scores use information from consumer credit reports to help predict an applicant's likelihood of filing insurance claims, subject to applicable state law. When an insurer takes adverse action against a consumer based in whole or in part on a consumer report, the federal Fair Credit Reporting Act requires an adverse action notice to that consumer, whether the person is an applicant or an existing policyholder.