What Is Underwriting?

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or credit) The word is derived from the practice of these institutions literally “writing” their name “under” the risk information for any given venture. The practice started with sometimes risky ventures such as sea voyages in the old days.

Underwriting has come a long way since those early times and have been affected by many changes over the centuries. Technology has probably had the greatest influence on underwriting and financing of risk… until now. We are getting ready to witness a huge change in how health insurance is underwritten. If everything goes into effect as it is supposed to, the health care exchanges will start open enrollment on Oct 1 of this year with coverage going into effect on Jan 1 of 2014.

Normally health insurance is underwritten by sex, age, health status, geography, habits, family history, tobacco use, etc. These criteria were used to properly assess the risk and assign an appropriate premium for the risk assumed by the insurer. Starting on Jan 1 of 2014 an insurer will only be able to use age, geography, tobacco use to underwrite the risk. Along with this, rate compression which is the requirement that rates for older insured will only be able to vary by a ratio of 3 to 1. The current ratio is anywhere from 8 to 1 up to 10 to 1. The overall effect of this is that unsubsidized rates are expected to fairly high within the health care exchanges, especially for younger enrollees.

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The only way for insurance to work properly is for the pool of insured to be large enough in any given situation, that the high users will be offset by those who do not have claims. This has always been the way insurance is supposed to work with any type of insurance. But with insurers being unable to properly underwrite the risk, it remains a question if the exchanges will ultimately succeed.

But before you think about dropping your coverage at work to shop for a plan on the exchange, there are a few caveats to keep in mind, especially about the subsidies. Even though it is true that the income requirements to receive a subsidy are quite generous; you will only be eligible for a subsidy under certain circumstances.

If you have group insurance at work and that coverage is affordable accordingly to the new law (less than 9.5% of you income) and is of minimum value (60% actuarial value), you will not be able to receive a subsidy from the exchange. So chances are if you have employer provided insurance at work, you are getting the best deal that you can get anyway. After all, the exchanges were originally designed to give uninsured individuals a way to buy coverage.

As always, advice from a qualified insurance broker who specializes in health insurance is vital when it comes to making decisions about your insurance program.

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