Underwriting is a process of taking a financial risk and payment guaranteeing in case of damage or loss. This service is typical for large financial establishments like insurance companies, banks, etc. Underwriting takes place when a bank lends money, a firm makes an investment, and so on.
Underwriting deals with risks. So, this process consists of researching and risk degree assessment. Underwriter assumes the risks of the partner company or applicants after making the actions, we have mentioned. Thanks to this the underwriter can set the fair borrowing rate or evaluate sufficient funds to cover possible investment losses. Nevertheless, if the concurrent risks are too high, the underwriter may decline the application.
There are 3 most widespread underwriting types:
Loans. Underwriting for loans usually goes automatically. The system will check the lendee’s credit history, financial behavior, and customs, the credit score (if applicable), etc. The dedicated professionals may add another data based on the loan’s size and purpose. The procedure may take different time from a couple of hours to weeks. For instance, a week or so is enough to make a decision about the loan. Nevertheless, when it comes to refinancing the decision-making time enlarges. The reason is that refinancing holds more risks and threats to the financial establishment involved.
Insurance. Here all goes around the policyholder. In other words, the underwriter or the program will access the risks connected with a person. Underwriting, in this case, has to do with life or health insurance. Based on the number of specific questions considering health state, profession, life habits, etc. the system can estimate the insurance cost. There are no declines in health insurance. But the underwriter can reject the life insurance application.
Securities. This financial risk assessment deals mainly with IPO. The company or an underwriter makes some actions on the investment bank’s or investor’s behalf. The goal of the procedure to evaluate securities’ prices and the risk connected with their purchase.