Underwriting Process
How a life insurer assesses a proposal — medical, financial and moral-hazard checks — the decisions that can follow, the proposer's duty of utmost good faith, and what section 45 says when a fact was not disclosed.
What underwriting is for
Underwriting is the process of evaluating the risk of insuring a person and deciding the premium to charge. The underwriter looks at health, lifestyle, occupation, financial position and family medical history, and places the applicant in a risk class so that the premium matches the risk.
If everyone paid one rate, people who knew their own risk was high would have the most reason to buy, a tendency called adverse selection, and those with ordinary risk would pay for it.
Three kinds of assessment
Medical underwriting evaluates health through questionnaires and, where the insurer calls for them, medical examinations, blood tests and an ECG. Tobacco use, for example, is commonly detected by testing blood or urine for cotinine, a breakdown product of nicotine; the level treated as positive varies with the laboratory and the test.
Financial underwriting checks that the cover asked for is in proportion to the proposer's income and financial position. Each insurer sets its own limits, often as a multiple of income.
Moral hazard is the risk that a person acts dishonestly or carelessly because insurance exists: hiding facts, seeking cover out of proportion to their means, or even causing a loss deliberately. Underwriters look for it through income checks, fraud indicators and by testing insurable interest, which in life insurance is tested when the policy is taken.
The possible decisions
A proposal may be accepted at the standard premium, accepted as a substandard or rated risk with a loading, accepted with an exclusion for a specific condition, or declined. A loading is an extra premium expressed as a percentage of the standard premium.
How a condition is treated depends on its severity and on the insurer. Active cancer treatment is likely to lead to a decline, mild hypertension or a raised body-mass index typically to a loading, while family history alone is noted but usually does not cause a decline.
Utmost good faith
Insurance rests on uberrima fides, utmost good faith: the proposer must disclose all material facts that could influence the insurer's decision, even if not specifically asked. Failure to do so can void the contract.
Section 45 of the Insurance Act, 1938 sets the limits. Within three years the insurer may call a life policy in question only for fraud or material misstatement, giving its grounds in writing. For a misstatement to count as material, the insurer must show that it would not have issued the policy had it known the fact. Where the ground is not fraud, the premiums are refunded within 90 days. After three years the policy cannot be questioned on any ground.
Rules at a glance
Two proposals, two outcomes
Illustration: Kiran and Dev, both 35, apply for the same term cover. Kiran's medical reports are normal and her income supports the cover, so she is accepted at the standard premium.
Dev's test is positive for cotinine and he has mild hypertension. He is accepted as a rated risk, with a loading on the premium. Had he been under active treatment for cancer, a decline would have been the likely outcome.
A loading and an income check
- Assumptions, for arithmetic only: standard premium ₹15,000 a year; loading 50%; the insurer's own limit on cover is 20 times annual income; the proposer earns ₹8,00,000 a year and asks for ₹3 crore.
- Loading = 50% × ₹15,000 = ₹7,500. Premium payable = ₹15,000 + ₹7,500 = ₹22,500 a year.
- Cover supported by income under this insurer's limit = 20 × ₹8,00,000 = ₹1,60,00,000, that is ₹1.6 crore.
- ₹3 crore asked for is above ₹1.6 crore, so the proposal is outside this insurer's limit; what follows depends on its underwriting rules.
Result. The loaded premium is ₹22,500 a year, and the income check supports ₹1.6 crore, not ₹3 crore. The multiple of 20 is invented; each insurer sets its own.
Key points
- Underwriting assesses the risk and prices it fairly, by placing each applicant in a risk class.
- The three assessments are medical, financial and moral hazard.
- Outcomes are standard acceptance, acceptance with a loading or an exclusion, or decline.
- A 50% loading raises the premium by half of the standard rate.
- The proposer must disclose all material facts, whether or not a question asks for them.
Common misunderstandings
- A 50% loading does not halve or double the premium: it adds 50% of the standard premium to it.
- Disclosure is not limited to the questions on the form: any material fact has to be disclosed.
- Income multiples are not IRDAI limits: each insurer sets its own financial underwriting rules.
Questions people ask
Why does a life insurer ask about income?
To check that the sum assured is in proportion to the proposer's income and financial position, which guards against over-insurance and moral hazard.
Is underwriting only about medical tests?
No. It also covers occupation, lifestyle, finances and signs of moral hazard.
Can a policy be questioned years later for a fact left out of the proposal?
Only within three years, and only for fraud or material misstatement, with written grounds. After three years section 45 bars any challenge.
What this lesson relies on
- Insurance Act, 1938 — section 45 (as amended with effect from 26 December 2014)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.