Understanding the underwriting process
The term underwriting came from the practice of risk-takers writing their names under the total amount of risk they took. Before going into the details of the role of an underwriter, let’s get an idea about the underwriting process and what all it entails. In the most basics sense, underwriting can be explained as a process where big financial institutions provide their services to cover the financial risk for any liability arising out of an agreement.
It can also be understood on the grounds of leveraging the risk in case of an uncertain event. The financial institution guarantees monetary aid in case of any undesirable outcomes mentioned in the contract. Underwriting is one of the most important functions in the banking and finance segment.
The underwriting services can be provided by an individual or an organization wherein the risk related to a business or investment is undertaken by the service provider for a premium amount. The underwriters are primarily available in banking, insurance and stock markets to hedge the risks.
Now that we have a fair idea as to what the underwriting process entails, let’s delve deeper into the roles of an underwriter.
Role of an underwriter
So what exactly does an underwriter do? Well, an underwriter is responsible for hedging your risk in case of uncertain events. The roles and responsibilities along with the purview of an underwriter differ depending upon what type of underwriting services are offered by them.
Underwriters primarily function in three sectors; the banking sector, the insurance sector and the stock market. Let’s look at the role of an underwriter in these contexts to obtain a better understanding of the role.
- Insurance underwriter: Insurance underwriters play a very crucial role in the insurance sector by hedging and dividing the risk associated with an insurance policy. Insurance underwriters are responsible for reviewing the application for risk coverage and conducting a thorough risk analysis.
Based on their risk analysis they accept or reject the application. Insurance brokers and other parties submit the insurance applications on behalf of their clients which are reviewed by the underwriter who then decides whether to provide insurance coverage or not. In addition to this, the insurance underwriters also advise on risk management issues and determine the extent of coverage for various parties.
- Mortgage underwriter: A mortgage loan underwriter is among the most common underwriters you’ll find. A lot goes into the mortgage application process. Thorough credit analysis is performed where the applicant’s income, credit records, cash flow, savings, etc. are assessed to determine the risk associated with loaning out the funds.
Mortgage loan underwriters are responsible for overviewing the financial track record of the individual and based on their assessment, they approve or discard the loan for an applicant. They are also responsible for reviewing the value of collateral pledged for the loan so that the loan can be recovered in case of default.
- Underwriting in the stock market: Underwriters in the stock market are responsible for determining the price of a security and identifying the risk associate with it. Let’s take an example to understand it. You must have heard about the IPOs where a company issues funds from the public by selling the shares of a company.
In this case, investment banks provide their underwriting services to evaluate the correct price of a security by factoring in all risks and benefits. The insurance bank buys or underwrites the security issued by the business entity and then sells it to the public. Here, the insurance banks underwrite or hedges the risk associated with the sales of security.
A career as an underwriter can be very rewarding depending upon which segment or industry you are aiming for. You can opt for an underwriting course to obtain a comprehensive understanding as to how the market functions and learn the skills needed to get a job as an underwriter in a reputed organization.
Also Read: What is Underwriter Salary