A Video Explaining the Nature of Insurance Underwriting

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Before the insurance claims adjuster begins a claims investigation he or she must understand the nature of underwriting because it is how an insurance policy comes into existence.

Underwriting is defined as the process of accepting or rejecting risks. It requires a determination by the underwriter of the risks for which insurance is sought and the terms under which the insurance will be written if the risk is acceptable. Underwriting insurance is a function unique to the insurance industry which transfers the risk of loss from the person or entity insured to the insurer.

Three centuries ago, insurance originally was a very personal matter. A property owner would discuss with an individual insurer the problems, values and risks of loss involved in a commercial enterprise. They would then agree upon the terms under which the insurer would insure the risk. Together they would draft a contract and the insurer would sign his name at the bottom — he literally underwrote the insurance.

When the Lloyd’s insurance marketplace started in Edward Lloyd’s coffee shop policies were often written in chalk on a blackboard and those who wished to join in the insurance would sign their name and the percentage they wished to take of the risk under the terms of the policy written on the board.

In its original usage, underwriting referred to the operation of the insurance business. Today, in application, there is a more restricted meaning applied to the term.

Underwriting, in modern usage, is a systematic technique for evaluating risks that are offered to an insurer by prospective insureds. The function of underwriting involves evaluating, selecting, classifying, and rating each risk. Underwriting establishes the standards of coverage and amount of protection to be offered to each acceptable risk. It formulates and administers the rules and procedures that are used to ensure that predetermined standards are met by underwriters. Underwriters are the risk takers. Adjusters only become involved when the risk becomes a loss and the adjuster is called upon to keep the promises made by the policy created by the underwriter.

In the US underwriting has become more corporate and less individual. Underwriters are now invariably employees of insurance companies and no longer put their personal fortunes at risk.

© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at and Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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