What is the purpose of underwriting in insurance?

The purpose of underwriting in insurance is fundamentally to evaluate risks and determine the terms and pricing of coverage. Underwriters assess information about applicants to identify the potential risks associated with insuring them. This includes analyzing factors such as the individual's or entity’s history, claims history, financial stability, and specific details relevant to the coverage being sought.

By conducting a thorough analysis, underwriters can set appropriate premiums, specify coverage limits, and establish conditions under which a policy will be offered. This critical function helps ensure that the insurance company can maintain profitability while providing protection to policyholders. Without effective underwriting, insurers would struggle to balance risk with financial stability, potentially leading to unsustainable loss ratios.

While setting rates based on claims history might seem relevant, it is just one aspect of the overall underwriting process, which encompasses a broader evaluation of risk. Facilitating customer service inquiries and processing claims are important operations in the insurance industry but are not directly related to the underwriting function itself.