Underwriting is one of the ways to reduce banking risks. A multi-level procedure for assessing the bank’s financial viability of an applicant for a loan, the probability of fulfilling or defaulting on loan obligations. Each banking institution has adopted its procedure and methodology, established its own rules that guide employees to study and analyze the solvency of a potential borrower who has applied for a loan. As a result of the underwriting procedure, a positive decision is made on an application for a loan or a refusal to provide a loan, or a compromise solution: granting a loan, but in the amount and/or on the terms that are beneficial to the bank, even if this is at odds with the client’s expectations. The underwriting insurance procedure is aimed at establishing the following points:
the ability of the borrower to repay the loan (assessment of the level of income),
The willingness of the borrower to repay the loan (analysis of credit history), ). There are two types of underwriting: automatic (scoring) and individual. Automatic verification is an express assessment of the solvency of a borrower in consumer lending for small amounts. This evaluation process is automated and the loan decision is made using the software. Simplified verification lasts from 5 minutes to 1 hour. Individual underwriting is used in the case of loans for large amounts (car loans, mortgages, etc.). To assess the borrower, several bank services are involved: credit, legal, security services, which check all the information provided more carefully, so the term for considering a loan application can take from 1 to 10 days. This is a labor-intensive procedure, the implementation of which requires special qualifications of bank employees.
How does the manual underwriting procedure work:
1. Consolidation of information about employment – its stability, total length of service, type of profession, the value of the borrower in the labor market. 2. Borrower’s expenses are analyzed. 3. Assess the ratio of the borrower’s total monthly obligations to total family income. 4. Study the borrower’s income – existing and projected. 5. Assess credit history for previous loan failures or successful repayment of previous debts. 6. Verify data on property ownership (real estate, cars, land, securities). 7. Take into account the level of education and age. 8. Analyze the success of the enterprise of the employer or the borrower in a market economy. 9. Study the accuracy and timeliness of paying utility bills. 10. Check for a criminal record, administrative responsibility, and other aspects of financial discipline. Benefits of underwriting: 1) Ability to set an adequate interest rate for the borrower. Instead of underwriting, you can set a higher interest rate and thus compensate for the credit risk. But such a simplified approach to work reduces the attractiveness of credit operations, and hence the number of customers. 2) An individual approach to each borrower, within which the required number of characteristics will be taken into account. Underwriting in insurance
Underwriting in insurance Due to the lack of an approved concept of “underwriting” in industry standards related to the field of activity of insurance companies, the systematization of approaches describing this term and its components have become very relevant. In this paper, the main definitions of this concept by foreign and Russian authors are analyzed and summarized. Recommendations are proposed on compliance with the main aspects of underwriting, which should be implemented at various stages of supporting an insurance contract, based on the characteristics of transactions carried out by insurance companies.
One of the main business processes in insurance is the underwriting of insurance contracts. Through this block of insurance activities, the key function of the insurer is implemented – risk assessment and acceptance. Despite the importance of this process, there is no unambiguous concept of “underwriting”. So, for example, this term is not fixed in any industry standard. It is possible to compensate for the lack of a definition in the Russian regulations of insurance activities by translating the terminological apparatus of the Solvency Directive of insurance companies – Solvency II (hereinafter – Solvency II). Let’s consider the main requirements for building a risk management system of this directive.
Underwriting in insurance
When making an insurance decision, a company must analyze all customer information to determine rates on a case-by-case basis. For example, life insurance cannot provide the same conditions to a young person without chronic diseases and bad habits, an extreme sportsman, and a person with severe chronic disease or bad habits.
In the insurance industry, an underwriter is a specialist empowered to decide on insurance, classify risks, and form an “insurance portfolio” based on data analysis.
The underwriter analyzes the likely risks, decides on insurance in each specific case, determines the tariff and terms of the insurance.