What Does Underwriting Risk Mean?
Underwriting risk is the risk of the premiums paid by policyholders not being sufficient to cover claims that the insurance company is liable to pay in case the event or contingency insured against takes place. This risk could include the underestimated liabilities arising from unpaid business written in previous years, i.e., expired policies, or this could even include underpriced policies in current use.
Insuranceopedia Explains Underwriting Risk
Occasionally, underwriting risks could arise from an inaccurate evaluation of the risks involved in writing an insurance policy. Alternatively, factors beyond the control of the underwriter could result in a situation in which the policy costs the insurer more than it has earned through premiums.
It is worth noting that the premium paid by the policyholder does not merely cover administrative costs. It must also cover claims that the policyholder could make on the policy. At the same time, it must comprise a risk premium equivalent to the return on the insurance company’s capital used for safeguarding the insurer from random fluctuations.