Underwriting is the procedure of assessing and quantifying the financial risk associated with an entity or an individual, typically in the context of extending loans, offering insurance coverage, or making investments. This evaluative process is conducted by underwriting experts employed by various financial institutions. The objective of this risk assessment is to safeguard the interests of investors, applicants, banks, and the overall financial market in the realm of financial agreements and transactions.

In this blog, we will delve into the types of underwriting and explore how automating this process can bring significant benefits to financial institutions.

What are the Types of Underwriting?

There are three different types of underwriting, let’s discuss them in brief.

What are the Types of Underwriting?

  1. Loan Underwriting

    Loan underwriting involves assessing the risk associated with lending money to potential borrowers. This process relies on four primary factors: the borrower’s income, property appraisal, credit score, and the assets they possess. While loan underwriting is often automated, in cases like mortgages, a human, known as a loan underwriter, is required. Mortgage underwriting involves evaluating the borrower’s income, credit score, financial liabilities, and savings to make an informed lending decision. Typically, mortgage underwriting takes about a week to complete.

  2. Securities Underwriting

    Securities underwriting is commonly associated with Initial Public Offerings (IPOs) and serves to evaluate the risk and fair pricing of specific securities. Investment banks, predominantly, are the investors involved in securities underwriting to determine the profitability of an investment. The process starts with an investor selecting potentially profitable securities offered by a company going public. These securities are then sold to other market buyers, allowing the investor to make a profit.
    Underwriters involved in securities underwriting often form an underwriter syndicate, purchasing securities after assessing the risk and then reselling them to other investors or brokers who, in turn, sell them to buyers in the market. Securities underwriting is crucial as it ensures that an IPO raises the necessary capital and provides underwriters with a premium for their services.

  3. Insurance Underwriting

    Insurance underwriting is the process of evaluating potential policyholders for various types of insurance, including life, health, property, and more. In the past, health insurance, for example, involved a medical assessment to determine the premium based on an applicant’s health status. Insurance companies could also refuse coverage based on an individual’s health condition. Insurance underwriting helps assess the risk of policyholders filing frequent and substantial claims and calculates the extent of coverage to be provided. It’s important for gauging the risk and coverage percentage for insured individuals.

Challenges with Underwriting

Manual Underwriting can be a challenging task, with intricacies, nuances, and a high likelihood of human error. It’s no surprise that relying solely on manual procedures can consume a lot of time and resources for human underwriters, impacting both profitability and customer satisfaction. Some of the underwriting challenges include:

  1. Data Quality & Availability
  2. Risk Assessment
  3. Claims Fraud
  4. Regulatory Compliance
  5. Data Privacy

What’s required is a solution that can deliver enhanced precision, faster processing times, and reduced errors—all without necessitating an increase in your workforce or placing additional demands on your IT department by introducing another infrastructure rollout.

Automated Underwriting System for Quick Decision-Making

Underwriting automation in financial institutions can eliminate low-value manual efforts and enable faster decision-making for employees. Also, using an automated underwriting system to automate multiple tasks involved in the underwriting process. Let’s discuss what can be automated in insurance underwriting using automation and AI solutions.

How Automated Underwriting System Work?

  1. Data Intake

    To assess credit risk, underwriters have to collect data like policy documents and loan details from multiple sources and formats. According to McKinsey, “anywhere from 30 to 40 percent of underwriting’s time is spent on administrative tasks, such as re-keying data or manually executing analyses.” And getting all the data in one place is a time-consuming exercise for underwriters.
    Here automation with intelligent document processing capability can handle this process and can do a lot better. Intelligent document processing in the underwriting process can easily extract data like loan and insurance documents and accumulate them in one system. From there, underwriters can check, analyze, and verify the data before making a decision.

  2. Risk Assessment

    As per a report, analysts spend up to 40% of their time validating data relevant to their analysis before making any conclusions. Using an underwriting automation system reduces the need for humans to collect data, underwriters get a full picture of data in one place. This enables underwriters to analyze large volumes of data in real time and assess the risk factors like credit score, underwriting documents, and customer behavior to make accurate decision-making. Moreover, machine learning algorithms can be trained to get historical data that can further help underwrites predict future risks and losses.

  3. Fraud Detection

    When there is a large volume of data to analyze and verify, human error is evident. With high-volume records, underwriters are often unable to detect fraud before it occurs. But that’s not the case with automation. Using machine learning and AI technologies with automation, underwriters can identify the inconsistency in the information provided and flag suspicious activities. This further reduces the chance of fraud in the business and saves the business from any financial losses.

  4. Regulatory Compliance Management

    The underwriting process must be in sync with the regulatory compliance offered by the financial institution. Any errors or discrepancies lead to financial risk and process inefficiency. Also, performing this process manually leaves the chances of manual error. Here, an automated underwriting system can be programmed to adhere to regulatory requirements and compliance standards and reduce the risk of non-compliance and associated penalties.

In the ever-evolving landscape of finance, embracing automation in underwriting not only brings operational efficiency but also ensures faster decision-making, improved accuracy, and, ultimately, enhanced customer satisfaction. As financial institutions continue to explore and implement these technologies, they are poised to reap the substantial benefits of automation in the world of underwriting.