In today’s financial world, Underwriting is one of the most important and crucial functions in which an individual or an institution undertakes the risk associated with a project, an investment, or a loan in return of a premium. Underwriters are found in the fields of banking, insurance, and stock markets.
The taxonomy ‘underwriting’ came from the norm of having risk takers to write their name beneath the total risk that she/he undertakes in lieu for a specific premium in the early years of the industrial revolution.
Description : Underwriting today is one of the prime functions in the financial world globally and it has turn out to be a discipline of sorts in itself.
Role of Underwriting in insurance
Underwriters find out
- Whether an insurance agency should undertake the risk of insuring a client, a project, a company.
- They determine the risk factor and exposure of clients
- Also the amount of insurance that should be granted to a client,
- Whether or not to offer an insurance policy to the client in the first place
- How much will they pay for it?
Role of Underwriting in stock market
In the securities market, underwriting involves
- Determining the risk and price of a particular security.
In this process which is seen most commonly during initial public offerings investment banks first buy or underwrite the securities of the issuing entity and later sell them in the stock market.
- Underwriting in stock market ensures that the issuers of the security can lift the full amount of capital at the same time earn the underwriters a premium in return for their service.
- Information provided by an underwriting agency can benefit the Investors as it can help them take a more well-versed buying decision.
- Provides the liquidity for the security
An underwriter who holds a large portion of the securities of a particular company or is the sole market maker for a security provides the core liquidity for the security.
- It boosts price stability and distribution too.
Role of Underwriting in banking
In the banking sector
- Underwriters carry out the critical operation of appraising the credit value of a potential buyer and whether offer or not to offer it a loan.
- They evaluate the credit history of the customer through their past and earlier financial record, statements, and value of collaterals provided, along with other factors.
How is digitalization important in Underwriting?
As digital capabilities have penetrated in nearly each and every industry today, there appears to be a big chance for Insurance companies to transform their business model digitally. Indeed, unless the industry perpetrates to integrating transformative technologies more quickly into their operations, Insurance companies will risk not only continued stagnation, but also potential leakage to InsureTech innovators as well. Digitalization of underwriting can also facilitate online distribution capabilities, allow insurers to cast their nets wider and hold close the younger demographics that time and again prefer a more virtual experience. Digitalization of underwriting also helps in taking better informed decisions for acceptance of risk.
Additionally, use of innovative tools will reduce the turnaround time and also help in minimizing the underwriting losses since the decision will be based on more precise data thereby reducing the downfall on profitability. Insurance companies are now changing the outlook of reviewing turn-around times from the intimation date and requirement completion date by settlement of claims within 24 hours to 2-4 days. A well-organized underwriting function that is well supported and enhanced by innovative data analytics tools will ensure that any potential cases of fraud claims are alleviated or minimized at the issuance stage itself. Use of modern technology like Blockchain, Artificial Intelligence, chatbots and many others will further improvise the overall customer satisfaction.