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The Purpose and Characteristics of Underwriting Life Insurance Insurance companies would like nothing more than to sell their policies to anyone wishing to buy them. However, they must exercise caution in deciding who is qualified to purchase insurance. Issuing a policy to someone who is uninsurable is an unwise business decision that can easily result in a company's financial loss. One of the primary responsibilities of an underwriter is to protect the insurer against adverse selection. Recall that adverse selection is the underwriting concept that involves the tendency of poorer risks to seek insurance coverage or the chance that an insurer will accept applicants who are bad risks (i.e., those in poor health, moral hazards, etc.). Simply put, those who are most likely to experience a loss are also most likely to seek insurance. Sound and competent individual or group underwriting will reduce the probability or chance of adverse selection. For example, a person with a life-threatening disease is typically more concerned or eager to obtain insurance coverage than an individual in good health due to the probability of imminent death. Just as each insurer determines the premium rates it will charge its policy owners, each insurer also sets its own standards as to what constitutes an insurable risk versus an uninsurable risk. Therefore, underwriting requirements vary by insurer. Every applicant for insurance is individually reviewed by a company underwriter to determine if the applicant meets the company's standards to qualify for its life insurance coverage. Underwriting, another term for risk selection, is the process of reviewing the many characteristics that make up the risk profile of an applicant to determine if the applicant is insurable and, if so, at standard or substandard rates. There are two fundamental questions underwriters seek to answer about an applicant: If the applicant and insured are two different people, does an insurable interest exist between the two of them? Is the applicant insurable?