What Is Underwriting?

Underwriting is a term used in the health insurance industry to describe the process of risk assessment, which ensures that the cost to cover a patient is proportionate to the risks faced by the individual. 

With underwriting, people in similar risk categories pay similar premium rates. Higher-risk patients pay higher amounts to be covered by insurance. 

What Does the Underwriting Process Determine?

This process determines how much an applicant is covered for and the premium that the applicant will receive for the insurance plan. If the risks of an individual are considered to be too high and the insurance company would have a loss from the transaction, coverage can be denied to the participant. 

Health Insurance Underwriting Factors

Multiple factors are considered when writing a health insurance policy. These factors can include age, weight and pre-existing health conditions. However, the Affordable Care Act has made it illegal for an insurance company to deny coverage strictly because the applicant has pre-existing conditions. 

Before the individual can purchase health insurance, he or she must meet the insurer's specific underwriting requirements. Once accepted, the risk factors are analyzed to determine if the applicant is offered a discounted premium, a standard rate or a substandard rate if they were a higher-risk applicant as determined through the underwriting process.

If the insurance is offered at a substandard rate, the insurer's offer may be missing some benefits or have a rider that excludes coverage for a certain condition to help protect the insurance company from experiencing loss when covering this higher-risk individual. 

Medical Factors

Risk factors that are evaluated include: 

  • Current health, physical condition, height and weight
  • Personal health history
  • Personal habits, including drug, alcohol and tobacco use
  • Age
  • Gender

Medical examinations may be required by the insurance company to verify the data provided by the insurer on their application. These exams usually are not required for a health insurance policy and are more commonly seen in life insurance policies. Smoking is proven to increase premiums in health care costs.

Other Factors

Other non-medical factors include considering your:

  • Occupation
  • Aviation activities
  • Military status
  • Sports involvement
  • Driving records
  • Financial status

The data collected and used by insurance companies to determine risk factors is compared against the data compiled by the Medical Information Bureau. It is a trade association that maintains extensive databases of medical information and occupational risk on different insurers' vocations. 

It helps track medical information while keeping each individual's privacy and identity confidential. An MIB report for each insurer is usually generated and reviewed for discrepancies to protect the interest of the insurance company.