How Insurers Price Their Products – Rating and Underwriting Basics

🧾 What is Rating?

Rating means calculating how much premium should be charged for a specific risk.

It’s like preparing a bill in advance for a future unknown loss.

Insurers use historical data, risk statistics, and actuarial models to decide:

• What risks exist

• How likely a loss is

• How much it may cost

Example

Two drivers apply for motor insurance:

• A 22-year-old with accident history

• A 45-year-old with clean driving record

The younger driver pays more because their risk rating is higher.

Higher risk = Higher premium
Lower risk = Lower premium

🛡️ What is Underwriting?

Underwriting is the decision-making process where the insurer examines a proposal and decides:

• Should we insure this person/property?

• At what premium?

• With what terms and conditions?

Underwriting checks whether a risk fits into the insurer’s appetite (acceptable risk levels).

Think of it like

A bank checks your credit before giving a loan.
Similarly, insurers check your risk profile before giving protection.

🤝 Relationship Between Rating & Underwriting

Rating tells how much to charge.
Underwriting decides whether to insure and how to insure.

Together, they ensure two things:

✔️ Fair premium for the customer
✔️ Financial safety for the insurer

🧠 What Do Underwriters Look At?

Depending on the product (life, health, motor, fire), they may review:

• Age and gender

• Occupation and lifestyle

• Medical reports

• Claims history

• Location of property

• Construction and safety features

• Driving patterns (for motor insurance)

Anything that changes the chance of loss is evaluated.

💡 Real-World Example

A factory applies for fire insurance.

Underwriter checks:

• Fire safety measures (extinguishers, sprinklers, alarms)

• Distance from fire station

• Whether flammable materials are stored

• Past fire incidents

• Building age and wiring condition

If safety measures are poor — insurer may:

• Load extra premium

• Add conditions (like installing fire equipment)

• Or decline the proposal

This protects both the business and the insurer.

🧰 Tools Used in Rating & Underwriting

Insurers rely on:

• Actuarial data (claim statistics, mortality/morbidity tables)

• Field surveys and inspections

• Medical tests (for life/health policies)

• Past loss experience

• Technology tools, telematics, AI, credit scoring etc.

Modern underwriting is tech-driven, but the logic remains the same — evaluate and price the risk correctly.

🧠 Why Advisors Should Understand This

When you know rating & underwriting basics, you can:

✅ Explain premium differences confidently
✅ Guide clients to improve insurability (safety measures, better disclosure)
✅ Prevent proposal rejection by collecting correct information
✅ Build trust and credibility as a knowledgeable advisor

💬 Advisor Script Suggestion

When a client questions premium:

“Insurance premium is calculated based on the level of risk.
Better safety, healthy habits, and clean history help reduce premium.”

Short and professional ✅

🎯 Key Takeaways

• Rating = Calculating premium based on risk

• Underwriting = Deciding acceptance, price, and terms

• Both ensure fair pricing and financial safety

• Accurate information and good risk management help customers get better terms

Insurance is not random pricing — it’s scientific, data-based, and fairness-driven.