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

Underwriting in Insurance: Process, Principles and Compliance

Updated 11 October 2026 · Fact-checked

Underwriting is how an insurer decides whether to accept a risk, on what terms and at what price. The underwriter collects information, classifies the risk, applies rates, and accepts, modifies or declines it. Under the Insurance Act, 1938, acceptance also depends on advance premium (Section 64VB), minimum motor third party share (Section 32D) and reinsurance duties (Section 101A).

Understand Underwriting in Insurance

Underwriting is the selection and pricing of risk. An insurer pools many policyholders and pays claims from the premium pool. If it accepts too many bad risks at low prices, the pool fails. Underwriting protects the pool and keeps premiums fair.

The underwriter works on three questions. Is this risk insurable? What is the likely loss? What premium and terms are right? To answer them, the underwriter studies the proposal form, medical or survey reports, claims history and the nature of the subject matter, such as a building, vehicle or life.

Risks are grouped into classes. A standard risk is charged the normal rate. A substandard risk is accepted with a loading (extra premium), a higher deductible, an exclusion or a special condition. A preferred risk may get a discount. Some risks are declined. This grouping is risk classification. Rating then fixes the premium for each class.

Underwriting rests on core insurance principles. Utmost good faith means the proposer must disclose all material facts. Insurable interest means the proposer must stand to lose if the event occurs. Spread of risk means the insurer avoids too much exposure to one risk, one place or one class. Underwriting is also not the same as reinsurance. Underwriting is accepting risk from the insured. Reinsurance is the insurer passing part of that accepted risk to another insurer, called a reinsurer.

The Insurance Act, 1938 sets compliance limits around this function. The insurer cannot assume risk without premium in advance, must write a minimum share of motor third party business as specified by regulations, must reinsure a specified share with Indian re-insurers, and must value its assets and liabilities properly.

Key rules to remember

Premium build-up (concept): Premium = Expected claims cost + Expenses + Margin for profit and contingencies; A general structure, not a statutory formula. Loading is added to this for substandard risks.
Section 64VB: premium in advance: No risk assumed until premium is received, guaranteed in the prescribed manner and time, or a prescribed deposit is made; Applies to business where premium is not ordinarily payable outside India. Where premium can be ascertained in advance, risk may be assumed not earlier than the date premium is paid in cash or by cheque.
Section 64VB(2) Explanation: Premium tendered by postal money order or cheque sent by post: risk may be assumed on the date the money order is booked or the cheque is posted; The Explanation is permissive ('may be assumed'). It fixes the date by posting or booking, not by receipt. It applies only where the premium is tendered by post. Keeping proof of posting is practical advice, not a statutory condition.
Section 64VB(3) and (4): refunds and agents: Refund goes directly to the insured by crossed or order cheque or postal money order; agent deposits collected premium in full within 24 hours, excluding bank and postal holidays; Refund can never be credited to the agent's account. The agent cannot deduct commission.
Section 32D: motor third party: Minimum percentage of motor third party business as specified by regulations; Applies to every insurer carrying on general insurance business. Authority may by regulations exempt insurers primarily in health, re-insurance, agriculture or export credit guarantee.
Section 101A: reinsurance with Indian re-insurers: Percentage of sum assured on each policy specified by the Authority (with previous approval of the Central Government); under s.101A(2)(a) no percentage so specified can exceed 30% of the sum assured on the policy; 'Policy' in s.101A(8) means a policy in general insurance business transacted in India, and does not include a re-insurance policy. The insurer may reinsure more than the specified percentage voluntarily. Under s.101A(3), a fire insurer may instead reinsure an amount out of the first surplus, if the aggregate reinsurance premium in a year is not less than the specified percentage of its premium income from that business.
Section 64V: valuation: For ascertaining compliance with s.64VA, assets are valued at not more than market or realisable value, and the Authority may exclude certain assets as specified by regulations; a proper value is placed on every liability as specified by regulations; Under s.64V(3), every insurer furnishes to the Authority, along with the returns under the Act, a statement of assets and liabilities as on 31 March each year. It is certified by an Auditor approved by the Authority (general insurance) or an actuary approved by the Authority (life insurance). It is furnished within the time specified by regulations.

How to solve Underwriting in Insurance questions

Use this order for any case or theory question on underwriting. It mirrors provision, analysis and conclusion.

1Identify what is asked: the underwriting process, a principle, a compliance rule, or a case on whether risk can be assumed.
2Define underwriting in one line and name the class of business involved (life, general, motor, fire, health).
3State the relevant principle or section in plain words with its exact conditions.
4Apply it to the facts: who paid what, when, by which mode, and to whom.
5Classify the risk if needed: standard, substandard, preferred or declined, and state the likely terms.
6Check linked compliance: advance premium, motor third party share, reinsurance percentage, valuation.
7Conclude clearly: accept, accept with terms, decline, or risk not yet on cover.
8Add one practical point, such as documentation, record keeping or a company secretary's role.

Quickest way: Four-line case answer

When to use it: Use when time is short and the question gives a fact pattern on premium, risk start or reinsurance.

Write the rule in one sentence with the section number.
Mark the key fact: date and mode of payment, or the percentage involved.
Compare the fact with the rule.
Write the conclusion starting with 'Therefore, risk can / cannot be assumed' or 'compliant / not compliant'.

Common mistakes in Underwriting in Insurance

Treating underwriting and reinsurance as the same thing.
Both involve accepting risk.
Fix: Underwriting accepts risk from the insured. Reinsurance transfers part of accepted risk to another insurer. Keep this contrast ready in two lines.
Saying the risk starts when the cheque reaches the insurer by post.
Students assume receipt matters.
Fix: Where premium is tendered by cheque sent by post, the Explanation to Section 64VB(2) says risk may be assumed on the date the cheque is posted (or the money order is booked). Write 'may', because the Explanation is permissive.
Stating the Section 101A cap as 30% of premium or as a fixed percentage.
Memorising only the number.
Fix: The cap is on the percentage the Authority may specify under s.101A(2)(a), and that percentage cannot exceed 30% of the sum assured on the policy. The Authority specifies the actual percentage, which may differ by class. Also remember that s.101A covers general insurance policies, not re-insurance policies.
Claiming that all insurers must write motor third party business.
Ignoring the proviso.
Fix: Section 32D applies to every general insurer but the Authority may exempt insurers primarily in health, re-insurance, agriculture or export credit guarantee.
Allowing an agent to deduct commission before depositing premium or receiving a refund.
Confusing trade practice with the Act.
Fix: Section 64VB(4) requires full deposit within 24 hours, excluding bank and postal holidays. Refunds go directly to the insured.
Listing principles without applying them to the facts.
Treating the paper as theory.
Fix: Link each principle to a fact, for example non-disclosure of a prior illness breaches utmost good faith and justifies loading or declining.

Worked examples

Example 1

Suresh Traders posts a cheque for the premium on a fire policy to Shield General Insurance on 10 March. The insurer receives it on 14 March. The insurer says cover can begin only from 14 March. Advise.

Show the solution

Rule: under Section 64VB, risk cannot be assumed until the premium is received, guaranteed or deposited as prescribed.
For risks where premium can be ascertained in advance, risk may be assumed not earlier than the date premium is paid in cash or by cheque.
The Explanation provides that where the premium is tendered by cheque sent by post, risk may be assumed on the date the cheque is posted.
Fact: the cheque was posted on 10 March.
Compare: the insurer may assume risk from 10 March. The Explanation is permissive, so the insurer is not bound to start earlier than it chooses, but receipt on 14 March is not a bar.
Practical point (not statutory text): the insured should keep proof of posting, such as a postal receipt, to fix the date.

Answer: The insurer's view is too narrow. Under the Explanation to Section 64VB(2), risk may be assumed from 10 March, the date of posting. The insurer is not required by the Act to wait until 14 March, the date of receipt.

Example 2

Explain how underwriting differs from reinsurance and state the Section 101A limit that applies to general insurance policies.

Show the solution

Define underwriting: the insurer selects, classifies and prices risk offered by the proposer and accepts, modifies or declines it.
Define reinsurance: the insurer cedes part of the risk it has accepted to a reinsurer to limit its own exposure.
Contrast: underwriting is with the insured and creates the policy; reinsurance is between insurers and protects the insurer.
Section 101A: every insurer must reinsure with Indian re-insurers the percentage of the sum assured on each policy that the Authority specifies with the previous approval of the Central Government. 'Policy' here means a policy in general insurance business transacted in India, not a re-insurance policy.
Limit: under s.101A(2)(a), no percentage so specified can exceed thirty per cent of the sum assured on the policy.
Note: the insurer may reinsure more voluntarily. A fire insurer may use the first-surplus alternative in s.101A(3) instead.

Answer: Underwriting is acceptance and pricing of risk from the insured. Reinsurance is transfer of part of that risk to another insurer. Under Section 101A, the percentage of sum assured that the Authority specifies for reinsurance with Indian re-insurers on general insurance policies cannot exceed 30%.

Exam tips

Write the section number with the rule when you are sure of it. Section 64VB, 32D, 101A and 64V are the key ones here.
In case questions, always quote the date and mode of payment from the facts before concluding.
Keep a two-line contrast between underwriting and reinsurance ready; it is a common short note.
Use the order provision, analysis, conclusion, and add a practical compliance point at the end.
For process questions, show the flow: proposal, information gathering, classification, rating, decision, policy issue.

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

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?

It is the process by which an insurer evaluates a proposed risk, classifies it, fixes the premium and terms, and decides to accept or decline. It protects the insurer's pool of funds and keeps pricing fair.

What are the main principles of underwriting?

The key ones are utmost good faith, insurable interest and spread of risk. Underwriters also aim for fair pricing, so similar risks are charged similarly.

What is the difference between underwriting and reinsurance?

Underwriting is accepting risk from the insured and pricing it. Reinsurance is the insurer passing part of that risk to another insurer. Section 101A requires insurers to reinsure with Indian re-insurers a percentage of the sum assured, as specified by the Authority, on policies in general insurance business in India. That percentage cannot exceed 30%.

Can an insurer start cover before receiving premium?

Generally no. Section 64VB bars an insurer from assuming risk until premium is received, guaranteed in the prescribed manner and time, or a prescribed deposit is made. The Central Government may relax this for particular categories by rules. Where premium is tendered by post, the Explanation allows risk to be assumed on the date of posting or booking.