Underwriters analyse the risk of offering a financial product to a specific client, with the aim of deciding whether the client is eligible to receive the product and, if so, how much it will cost them.
In the credit industry, underwriting is the process of establishing a customer’s suitability for a loan or credit card, typically based on credit scoring and other information either publicly-available or provided by the borrower.
In the context of insurance, underwriters analyse risk and decide on the cost (the insurance premium) of providing insurance against that risk. Organisations functioning as underwriters have internal rules on how to analyse risks and what risks the company should accept. Risk criteria differ between industries – smoking is a risk factor for medical insurance, for example. Organisations are increasingly using automated systems to analyse risk and generate a figure for the premium that is commensurate with the level of risk.
Underwriters do not always deal with customers directly – many insurance companies are merely agents that sell insurance policies which are underwritten by a third-party. The agents are able to provide a greater range of insurance products, the underwriters gain access to a wider market and potential clients have a more competitive market and more diverse range of products to choose from.