Underwriters; Everything you need to know
If you’ve ever read through your insurance documentation, you may have come across a section with the words ‘underwritten by’ followed by either the company you purchased your policy from, or in some cases companies you’ve never even heard of. It’s even possible to have several companies named as the underwriter for a policy.
So what does this all mean? How does this impact your policy and should you take these factors into consideration when making a purchase? Read on for our in-depth look at underwriting agencies and how they differ, so that you can make an informed choice the next time you buy an insurance policy.
- What does ‘underwritten by’ mean?
- Why would your underwriter be different to your insurance company?
- What is a Managing General Agent?
- What’s the difference between underwriting and reinsuring?
- How can different underwriters affect policies?
- How can different underwriters affect claims?
What does ‘Underwritten by’ mean?
When an insurance policy says ‘underwritten by’ it is naming the company responsible for paying claims settlements if you suffer from a covered loss. Importantly, this doesn’t necessarily have to be the company you purchase the insurance policy from.
History of the term ‘Underwriting’
Back in the 17th century, ship insurance policies would need to be signed by the individuals agreeing to pay for losses[symbol:m-dash ]these individuals would write their names on the ship’s insurance application slip, along with the percentage of loss they would be willing to pay for. Hence the term ‘underwriter’ literally meaning someone who ‘writes under’.
Additional meanings of the term ‘Underwriting’
‘Underwriting’ also refers to the process of setting up a policy according to a client’s specific needs. Underwriters can modify clauses, amend cover limits and add terms and conditions depending on how much risk they are looking to take on. An underwriter will determine final prices, excesses and make decisions such as whether to offer finance or request payment in full up front.
Underwriter vs. Underwriter—additional meanings.
In the early days of insurance an underwriter carried out both the risk assessment and financial backing as an individual—they had money to pay claims and they would personally lose money if they had to pay out too many claims.
These days the term ‘underwriter’ can refer to business employees and to the businesses themselves, since now it’s far more common for businesses to provide the financial backing for insurance policies and have their employees carry out the risk assessment. The role has split into two areas but the name can now be applied to both the business and the employee.
Book vs. individual underwriting
Underwriters can work on an individual policy basis, tailoring each policy to each applicant, or they can work across an entire ‘book’ of business; setting broad rules and exceptions for everyone in the group which determine clauses, premiums and other special terms.
Most small business, motor, and home insurance tends to be underwritten on a ‘book’ basis due to many applications being very similar to one another. If ever an application is significantly different (i.e. an unusual house, car, or claims record) underwriters will get involved and produce a bespoke policy to suit the needs of the applicant.
Why would your underwriter be different to your insurance company?
Your underwriter might be different to your insurance company for several reasons:
- Insurer Expertise If an insurer specialises in a certain type of policy but needs financial backing they may outsource underwriting to a larger or more wealthy company who wants to offer policies, but lacks the relevant expertise.
- Cost If an insurer’s claims costs rise too high they might outsource some or all of their claims payments in exchange for a portion of the policy premiums.
- Risk Appetite Sometimes insurers want to broaden their product base without taking on too much additional risk, so they may share or entirely outsource losses to third party underwriters.
- Risk sharingSeveral companies might agree to work together to insure a particularly difficult policy type, listing several companies as underwriter.
- Market access / schemes Governing bodies, trade associations, or banks may want to offer their members branded insurance policies, so they approach an established insurer to underwrite a tailored policy. Similarly an international company might want to access a national market, so they choose an already established local company to partner with to sell policies.
The underwriting company will set policy prices and if your needs are particularly unique your application may be referred to the underwriting company for a final say on pricing or terms and conditions.
Insurance brokers, agencies, and trade associations all typically offer policies underwritten by other companies. Read more about the difference between brokers, agencies and direct insurers .
Direct Insurance companies are less likely to offer policies underwritten by others; as the name implies they are offering you their own policies ‘direct’ and usually take responsibility for underwriting.
What is a Managing General Agent?
A managing general agent (MGA) is an insurance provider acting on behalf of one or more underwriters (as their ‘agent’), where the provider has the authority to set prices and manage claims. MGA’s are hybrids which are not quite direct insurers and not quite underwriting agencies—if you buy a policy from an MGA the terms and conditions may state ‘Underwritten by company a: 50% and company b: 50%’.
A managing general agent is usually formed to take advantage of specialist underwriting experience in high risk areas—it makes sense to have experienced underwriters create policies for niche clients but in high risk industries like construction it also makes sense to share the risks across several companies.
Another benefit to insurers of operating an MGA is that the underwriting partners are usually only tied in to annual or two year contracts—they can leave the agreement if too many claims are made, or if they don’t hit profit target. This leaves the ‘primary’ insurer or agent in need of another underwriting partner to share the risk, which can be problematic or impossible.
What’s the difference between underwriting and reinsuring?
An underwriting (insurance) company pays claims if they are covered by their insurance policies, or by policies which they have agreed to underwrite for other companies or agents. Such companies can then take out ‘re-insurance’ policies on an individual or book basis with one or more reinsurance companies.
- You own a multinational retail business with billions of dollars of turnover every year. One of your main products needs to be recalled, at a cost of hundreds of millions, but your insurance policy pays for the cost. Your insurer likely has reinsured your specific policy with several if not tens of reinsurers and will have some or all of their own losses paid back to them.
- Storm season causes hundreds of millions of dollars in damage this year, far more than was forecast by risk models. Several of the main insurers will need to pay vast sums in claims to rebuild, but they have reinsured their ‘book’ of property insurance to protect against losses over a certain amount, and will be able to claim their losses back.
How can different underwriters affect policies?
Policies underwritten by other companies can be an indication that you are purchasing cover from an agency rather than a full-blown insurance company. A good example of this is your mobile phone provider or bank offering you device, car or home insurance. Your policy may say your bank’s name on the top but it might be underwritten by someone else.
Why does it matter?
It matters because knowing who underwrites your policy lets you look into who they are and how they operate, and it empowers you to make informed decisions on where to purchase your insurance. If you’ve had a bad experience with one insurance company but your bank is offering you a cheaper quote, would you take it if you knew that same insurer was the underwriter?
Similarly, if you have personal concerns over the way in which a company is doing business, you can report them to the underwriting company as well as the FCA. If you ever need to make a complaint against an insurer, broker or agent knowing who in the insurance chain to hold responsible can save you time and stress.
How can different underwriters affect claims?
Being able to identify the underwriter of a policy will let you check into their claims reviews online. Most insurers have some poor claims reviews as any claim can be a contentious experience, especially when certain losses aren’t covered by policies .
- Be aware that a complaint that ‘x’ wasn’t covered on a policy reflects more on the consumer than the insurance company – it is your responsibility to confirm that the policy you purchase covers the right losses. You can always ask insurers to explain their policy covers in writing, and most policies come with clear details on what is and isn’t covered in their documentation.
Still, knowing the underwriter lets you make an informed decision as to which policy you ultimately choose. Some insurers or underwriters will handle claims in-house, others will outsource claims to third parties, and if you feel strongly about the latter it certainly helps to review the experiences of other people and address your questions to the person giving you a quote.
Understanding the meaning of the ‘underwritten by’ section in your policy documentation can help you to obtain better quotes, avoid companies you prefer not to purchase from, make informed choices about who you do want to buy insurance from, and hold the correct people accountable if anything ever goes wrong.
If you’re ever in doubt as to who underwrites your policy you can always call and ask representatives to tell you; it’s not privileged information. You can then approach that insurer directly (if they have a direct branch) and see if they can cover you for a better deal, or ask your representative why you should choose their business over their underwriting agency—often they can offer you discounts or incentives.