What does “underwriting” mean in insurance?

Underwriting in insurance refers specifically to the process of evaluating risk and determining the appropriate premium for coverage. This involves assessing the potential policyholder's risk factors—such as their health, age, driving history, and other relevant criteria—to establish how likely they are to make a claim. The underwriter's job is crucial because it helps insurance companies decide whether to accept or decline insurance applications and to ensure that premiums are set at a level that will cover the anticipated costs associated with the insured risks.

This process balances the insurer's need to remain profitable while providing necessary coverage to policyholders. Thus, underwriting directly influences the financial stability and sustainability of the insurance company.

The other options reflect different aspects of the insurance process. Approving claims is a function that occurs after underwriting, focusing on validating and paying out claims rather than assessing risk. Marketing insurance policies is related to selling the policies but does not encompass the risk assessment aspect. Setting aside funds for future claims pertains to reserve management, which is a separate operational aspect of an insurance company that ensures they have the necessary funds available to meet anticipated claims.