The term “underwriting” stems from the way individuals used to request a loan or insurance in the past. The banker or other professional would sign their name under the risk they decided to take on.
Today, underwriting refers to how someone receives a loan or insurance or makes an investment.
Through underwriting, an individual or business in the financial sector takes on a risk for a fee. This is normally in the form of a monthly payment.
For someone to receive payment or protection, the underwriter applies risk management to determine the degree of peril. From there, they determine if the person or company is qualified, if they should receive less than requested, or if they won’t get anything at all.
The Pros of Underwriting
Underwriting is used to set borrowing rates that are fair to all who apply. Additionally, it establishes appropriate premium payments while also creating or expands the market for such risks.
For instance, when a company decides to file for an IPO, the underwriting firm confirms they can raise the appropriate amount of capital. If done properly, investors feel confident enough to invest in the IPO. As a result, both the company and the underwriter make a profit.
On a personal level, mortgage underwriters review a home buyer’s finances to see if they can afford the home they desire. They look at their debt-to-income ratio and credit reports. They also check on pre-approved loan agreements other underwriters made.
When it comes to health insurance, the underwriting department looks at numerous factors to determine the amount of coverage and the monthly premium. They examine the individual’s weight and health as well as their medical history for signs of chronic issues. These all factor into approval or denial of insurance.
Generally, underwriters are risk managers. They follow the six steps connected to the operation. They identify the risk — for example, granting a loan or insurance — and analyze the potential issues through extensive research. Then, they evaluate those risks. It’s at this point that they decide if approving the loan or an insurance claim is worth the risk.
If they decide the risk is worth it, they look for ways to minimize potential dangers. In the case of real estate, they might ask the homebuyer to purchase mortgage insurance to cover potential losses. For health insurance, they’ll request the individual pay a higher monthly premium.