Before we jump into understanding what are the types of underwriting it is useful to understand the underwriting meaning first.
Table of Contents
- 1 Underwriting meaning
- 2 Underwriting in insurance
- 3 Types of underwriting in insurance
- 4 Loan underwriting
- 5 Insurance underwriting
- 6 Securities underwriting
- 7 Conclusion
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. Underwriting 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
- Wholly underwritten: In this type one person is responsible to subscribe to all the issues.
- Partially underwritten: In this type some part of the issue is underwritten by the company.
Types of underwriting contracts
- 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.
- 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.
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.
Underwriting in insurance focuses on the potential policyholder who is seeking health or life insurance. In previous years, in an attempt to determine how much an applicant should be charged based on their health and whether to offer coverage at all, medical underwriting for health insurance was used. This was often based on the applicant’s pre-existing conditions.
However, under the Affordable Care Act insurers were no longer allowed to deny coverage or impose limitations due to pre-existing conditions from 2014.
The underwriter in life insurance underwriting determines the age, health, lifestyle, occupation, family medical history, hobbies, and other factors of a potential policy holder to assess the risk of insuring. Life insurance underwriting is not restricted to any health factors or pre-existing conditions, as opposed to health insurance.
Underwriting in insurance can result in approval with an addition of a whole range of coverage amounts, prices, exclusions and conditions or even an outright rejection.
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 is when more than one or multiple underwriters or a group of underwriters is involved in the underwriting process.
Keeping in mind all that you have read, can you now respond to someone who asks the basic underwriting meaning?
Understanding the underwriting process is just a basic step, digging into the types of underwriting in insurance gives you an in-depth knowledge and understanding of underwriting in insurance.
Moreover, underwriting is a fundamental part of today’s financial world and without being able to answer what are the types of underwriting you can not claim that you have developed an understanding of the underwriting process.