What Are The Types Of Underwriting?

Before we jump into understanding what are the types of underwriting it is useful to understand the underwriting meaning first.

Underwriting meaning

Underwriting process can be explained as a procedure through which financial risk is taken on by an individual or an institution for a fee. This risk typically involves loans, investment or insurance.

The term underwriter denotes a practice of having each risk-taker write their name under the total amount of risk they are willing to accept for a specified premium. Under writing continues as a key function in today’s financial world despite the mechanics that have changed over time.

Underwriting in insurance

Underwriting lays the foundation of the whole insurance industry which is why it is considered very important for underwriters to make the right decision. It is up to the underwriters to make sure that a correct level of risk is entering the industry and it is matched by the right premium.

Principles of underwriting in insurance

These principles are a set of requirements or rules that are provided by an insurer or an insurance carrier for its agents and underwriters. These principles are used by the underwriter to make decisions regarding acceptance, modification, or rejection of an insured prospective.

Underwriting risk in insurance

The risk of loss borne by an underwriter is referred to as an underwriting risk. An inaccurate assessment of the risks associated with writing an insurance policy is what arises as an underwriting risk in insurance. Underwriting risk in insurance may arise from uncontrollable factors too. The insurer’s costs may significantly exceed earned premiums as a result.

Types of underwriting in insurance

1. Wholly underwritten: In this type one person is responsible to subscribe to all the issues.
2. Partially underwritten: In this type some part of the issue is underwritten by the company.

Types of underwriting contracts

1. Normal underwriting: In this type of contract the underwriter agrees to take up shares/debentures only when the issue is not subscribed by the public in full.
2. Firm underwriting: In this type of contract an underwriter agrees to buy a certain number of shares/debentures in addition to the shares he has to take under the underwriting agreement. Even if the issue is oversubscribed, underwriters are responsible to take up the agreed number of shares in case of firm underwriting.

Loan underwriting

All loans undergo some form of underwriting or a part of the underwriting process. There are a number of cases in which underwriting is automated and involves appraisal of applicant’s credit history, financial records and the value of any collateral offered in addition to other factors depending on the size and purpose of the loan. The appraisal process can either be almost instant or take up to a few hours, days or even weeks,

Mortgages is the most common type of loan underwriting that involves a human underwriter. It is also the type of loan underwriting that is faced by most people during their lifetime.

Depending on an individual’s financial circumstances the underwriter assesses income, debt, savings and credit history. Turn-time of mortgage underwriting is typically a week or less.

Refinancing is part of the loan underwriting process that often takes longer due to the preferential treatment that buyers who face deadlines get. Loan applications do get approved but if they get denied, suspended or get a conditional approval it means that the underwriter demands some clarification or additional documentation.

Insurance underwriting

Insurance underwriting, a pivotal process in the insurance industry, actively evaluates potential policyholders, particularly those seeking health or life insurance. Traditionally, health insurance underwriting scrutinized applicants’ health statuses, often considering pre-existing conditions to determine coverage and pricing.

However, with the enactment of the Affordable Care Act in 2014, insurers were mandated to refrain from denying coverage or imposing limitations based on pre-existing conditions, reshaping the landscape of health insurance underwriting.

Conversely, life insurance underwriting employs a multifaceted approach, analyzing factors such as age, health, lifestyle, occupation, family medical history, and hobbies to gauge the risk associated with insuring an individual. Unlike health insurance underwriting, life insurance underwriting isn’t constrained by health factors or pre-existing conditions.

The underwriting process in insurance yields various outcomes, ranging from approval with tailored coverage amounts, prices, exclusions, and conditions to outright rejection. This dynamic evaluation ensures that insurance policies align with the risk profiles of applicants while balancing affordability and coverage adequacy.

In essence, insurance underwriting serves as a pivotal mechanism, actively assessing risks and determining the viability of coverage options for potential policyholders, thereby facilitating informed decision-making in the insurance landscape.

Securities underwriting

This type of underwriting seeks to assess the risk and appropriate price of particular securities. It is related to an IPO which is performed on behalf of a potential investor or often an investment bank..
Investment banks underwrite securities issued by the company attempting the IPO which is based on results of the underwriting process and then these securities are sold in the market.

Underwriting process makes sure that the IPO company raises the amount of capital needed and the underwriters are provided with a premium of profit for their service. Vetting is a part of the underwriting process which the investors make good use of as it enables them to make an informed investment decision.

Individual stocks, debt securities including government, corporate, or municipal bonds are all involved in underwriting in the financial market. Moreover, these securities are purchased by underwriters or their employers to resell them for a profit either to dealers who later sell them to other buyers, or investors.

Underwriter syndicate

Underwriter syndicate is when more than one or multiple underwriters or a group of underwriters is involved in the underwriting process.

Conclusion

Understanding the underwriting process serves as a foundational step, but delving into the various types of underwriting in insurance enriches your comprehension significantly.

Moreover, underwriting stands as a cornerstone in today’s financial landscape. To truly grasp the underwriting process, it’s essential to be well-versed in its diverse types. Without this knowledge, claiming a comprehensive understanding of underwriting remains incomplete.