What Is Underwriting?

What Is Underwriting?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Underwriting is a process used by financial service companies, like banks, insurance, or investment houses, where they evaluate the risk and exposure of potential clients. This process helps them determine the conditions under which they would agree to fulfill a contract with the potential client. In simpler terms, underwriting is basically how banks decide whether to approve a loan or an insurance cover, and what the terms of that approval would be.

Related Questions

1. What role does an underwriter play?

An underwriter’s main role is assessing risk. They scrutinize the client’s application, assess the risk involved in approving an application and decide on the terms of the contract. They also determine the premium in insurance or the interest rate in the case of loans.

2. What is underwriting in insurance?

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In insurance, underwriting involves the insurance company evaluating the risks involved in insuring a potential client. The underwriter uses this information to determine the premium that the client should pay. If the risks are too high, the underwriter may choose to decline the coverage.

3. What is underwriting in banking?

In banking, underwriting is the process a bank or other financial institution uses to assess a borrower’s creditworthiness. They examine the borrower’s credit history, financial statements, and other data to decide whether to approve a loan and what the interest rate will be.

4. What is the result of the underwriting process?

The result of the underwriting process usually ends with the approval or decline of a contract. If the potential client is considered to be low risk, the underwriter will approve the contract and set terms. If the potential client is high risk, the contract may be declined or accepted with high premium or interest rate.

5. What information is needed for underwriting?

During the underwriting process, several pieces of information are needed, which include the applicant’s credit score, income proof, employment history, and asset documentation. In the case of medical or life insurance, health information is required. For property insurance or mortgages, details about the property are required.