Banking and Insurance - Laws and Practice · Functions in Insurance and Compliance related thereto (Part V)

Underwriting in Insurance: Process, Principles and Compliance

Updated 11 October 2026 · Fact-checked

Underwriting is the insurer's process of examining a proposal, classifying the risk, deciding whether to accept it, and fixing the premium and terms. You answer questions by stating the process, the principles applied, and the compliance rules that follow, such as no rebates, premium in advance and reinsurance.

Understand Underwriting in Insurance

Underwriting is how an insurer decides which risks to take on and at what price. An insurer pools premiums from many people and pays claims out of that pool. If it accepts too many bad risks at low prices, the pool runs dry. Underwriting protects the pool and keeps the insurer solvent.

The process usually runs in this order. The proposer fills in a proposal form and gives material facts. The underwriter checks the information, and may ask for medical reports, surveys or inspections. The risk is then classified into a group of similar risks, such as standard, substandard or declined. Next the underwriter prices the risk by applying the rate for that class, with loadings or discounts as needed. Finally the insurer accepts, accepts on modified terms, or rejects the proposal.

Underwriting rests on the core insurance principles. Utmost good faith requires the proposer to disclose all material facts. Insurable interest must exist. The underwriter seeks a fair spread of risks, avoids adverse selection (people with higher risk being keener to buy cover) and keeps rates fair, adequate and not unfairly discriminatory. Large risks beyond the insurer's own capacity are shared through reinsurance.

Underwriting is different from reinsurance. Underwriting is the insurer's decision on a proposal from its own customer. Reinsurance is the insurer itself buying cover from another insurer for part of the risk it has accepted. Underwriting comes first; reinsurance follows from it.

The Insurance Act, 1938 and IRDAI rules surround this function with compliance duties. Key ones are the ban on rebates (Section 41), receipt of premium before risk is assumed (Section 64VB), compulsory reinsurance with Indian re-insurers for general insurance (Section 101A) and sufficiency of assets (Section 64VA). For specific IRDAI underwriting guidelines, rely on the regulations in your study material rather than memorised summaries.

Key rules to remember

Prohibition of rebates (Section 41): No rebate of commission or premium as inducement to take out, renew or continue insurance, except as per the insurer's published prospectus or tables; Applies to the person offering and the person accepting. Penalty may extend to ₹10 lakh (Section 41(2)).
Premium in advance (Section 64VB(1)): No risk assumed until premium is received, or guaranteed in the prescribed manner and time, or a prescribed deposit is made in advance; Central Government may relax this for particular categories of policies by rules (Section 64VB(5)).
Premium by post (Section 64VB Explanation): Risk may be assumed on the date the money order is booked or the cheque is posted; Applies where premium is sent by postal money order or by cheque through post.
Agent's duty on premium (Section 64VB(4)): Deposit or post the full premium, without deducting commission, within 24 hours of collection, excluding bank and postal holidays; Refunds go directly to the insured by crossed or order cheque or postal money order, never to the agent's account (Section 64VB(3)).
Compulsory reinsurance (Section 101A): Percentage of sum assured on each general insurance policy to be reinsured with Indian re-insurers, as specified by the Authority; never more than 30% of the sum assured; Fixed by notification, with previous approval of the Central Government and after consulting the Advisory Committee. Insurer may reinsure more voluntarily (Section 101A(7)).
Sufficiency of assets (Section 64VA(1)): Excess of assets over liabilities ≥ 50% of the minimum capital under Section 6; Computed as specified by regulations. Failure makes the insurer deemed insolvent and open to winding up on the Authority's application.

How to solve Underwriting in Insurance questions

Use this order for any case or theory question on underwriting. It keeps your answer in the provision, analysis, conclusion format.

1Identify the stage involved: proposal, risk classification, pricing, acceptance, premium receipt or reinsurance.
2State the underwriting principle at play, such as utmost good faith, insurable interest or avoiding adverse selection.
3Name the governing provision from the Insurance Act, 1938 and state it in plain words with its exact conditions.
4Apply the rule to the facts: who acted (insurer, agent, proposer), what they did, and when.
5Check the timing: was premium received before the risk began, and was it deposited within 24 hours by the agent?
6Check inducements: was any rebate offered or accepted outside the published prospectus or tables?
7Conclude clearly: whether the act is valid or a breach, and state the consequence such as the penalty up to ₹10 lakh.
8Add a practical compliance point, such as keeping underwriting records and following the board-approved underwriting policy.

Quickest way: Four-line underwriting answer

When to use it: Use when time is short or the question asks for a short note on underwriting.

Define underwriting in one line: selecting, classifying, pricing and accepting risks.
List the process stages: proposal, verification, classification, pricing, decision.
Give the principles: utmost good faith, insurable interest, spread of risk, no adverse selection.
Close with compliance: Section 41 rebates, Section 64VB premium in advance, Section 101A reinsurance.

Common mistakes in Underwriting in Insurance

Treating underwriting and reinsurance as the same thing.
Both involve accepting risk, so they look alike.
Fix: Underwriting is the insurer accepting a proposal from its customer. Reinsurance is the insurer passing part of that risk to another insurer.
Saying risk can be assumed on a promise to pay later in every case.
Students forget the advance premium rule.
Fix: Under Section 64VB, premium must be received, or guaranteed in the prescribed manner and time, or a prescribed deposit made. The Central Government may relax this for certain categories by rules.
Stating that all rebates are banned.
The rule is remembered without its exception.
Fix: Section 41 allows a rebate in accordance with the insurer's published prospectuses or tables. There is also a proviso for a bona fide agent insuring his own life, on prescribed conditions.
Quoting the reinsurance percentage as fixed at 30%.
The upper limit is confused with the actual rate.
Fix: The Authority specifies the percentage, which may differ for classes of insurance. It cannot exceed 30% of the sum assured on a policy.
Saying the agent may deduct commission before remitting premium.
Common trade practice is assumed to be lawful.
Fix: Section 64VB(4) requires the premium in full, without deduction of commission, within 24 hours of collection, excluding bank and postal holidays.
Applying Section 101A to life policies.
The word 'policy' is read generally.
Fix: Section 101A defines policy as one issued or renewed in respect of general insurance business in India, excluding a reinsurance policy.

Worked examples

Example 1

Suraksha General Insurance Ltd's agent, Mr Rao, collects a premium of ₹48,000 on a motor policy by cash on Monday and keeps ₹4,800 as his commission, depositing ₹43,200 with the insurer on Tuesday. Advise on the compliance position.

Show the solution

Provision: Section 64VB(4) requires an agent who collects premium to deposit or post it to the insurer in full, without deduction of commission, within 24 hours of collection, excluding bank and postal holidays.
Analysis on amount: Mr Rao deposited ₹43,200 and not ₹48,000. He deducted ₹4,800 (48,000 − 43,200), which is ₹4,800 of commission.
Analysis on time: he deposited on the next day, which is within 24 hours, so timing is not the issue. The deduction is.
Conclusion: Mr Rao breached Section 64VB(4) by deducting commission. He should have remitted the full ₹48,000 and received commission from the insurer later.
Compliance point: the insurer should reject net remittance practices, pay commission through its own system and record premium receipts properly.

Answer: Mr Rao breached Section 64VB(4). The 24-hour timing was met, but premium of ₹48,000 had to be remitted in full, not ₹43,200 net of ₹4,800 commission.

Example 2

To win a health insurance proposal, an insurer's agent offers the proposer a return of part of the first-year premium, not mentioned in the insurer's published prospectus or tables. The proposer accepts and buys the policy. Examine the legal position.

Show the solution

Provision: Section 41(1) prohibits anyone from allowing or offering any rebate of commission or of premium shown on the policy, directly or indirectly, as an inducement to take out, renew or continue an insurance. It also prohibits the person taking out the policy from accepting a rebate.
Exception: only a rebate allowed under the insurer's published prospectuses or tables is permitted.
Analysis: the return of part of the premium was offered as an inducement, and it is not in the published prospectus or tables. So the exception does not apply.
Both sides: the agent offered the rebate and the proposer accepted it, so both acted against Section 41(1).
Consequence: under Section 41(2) a person who defaults is liable to a penalty which may extend to ₹10 lakh.
Compliance point: the insurer should train agents on rebate rules and offer discounts only if they are in filed and published tables.

Answer: The rebate is prohibited by Section 41(1). Both the agent and the proposer are in default, and each may face a penalty which may extend to ₹10 lakh under Section 41(2).

Exam tips

Write the section number with its rule in plain words. Section 41, 64VB, 101A and 64VA are the safest ones to cite.
Show the process as numbered stages in a short note, then add principles and compliance for full marks.
For case questions, follow provision, analysis, conclusion, and give a practical compliance point at the end.
Always state the exceptions: published tables under Section 41, relaxation by rules under Section 64VB(5).
If you are unsure of an IRDAI regulation's exact title or number, describe the requirement in words rather than guess.

Practice questions from Functions in Insurance and Compliance related thereto (Part V)

Underwriting in Insurance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Underwriting in Insurance: frequently asked questions

What is underwriting in insurance?

Underwriting is the insurer's process of assessing a proposal, classifying the risk, deciding on acceptance and fixing premium and terms. Its purpose is to keep the risk pool balanced and the insurer solvent.

What is the difference between underwriting and reinsurance?

Underwriting is the insurer's decision to accept a risk from a proposer. Reinsurance is the insurer passing part of the accepted risk to another insurer. For general insurance, Section 101A requires reinsurance with Indian re-insurers at a percentage the Authority specifies, up to 30% of the sum assured.

Can an insurer start cover before it receives the premium?

Generally no. Section 64VB says the risk is not assumed until premium is received, guaranteed in the prescribed manner and time, or a prescribed deposit is made. Rules may relax this for particular categories of policies.

Are IRDAI underwriting guidelines part of this topic?

Yes, as regulatory context. Underwriting policy is set by the insurer within IRDAI regulations. Study the specific regulations in your ICSI material, and do not cite regulation numbers you are unsure of.