Underwriting is the process of assessing a customer’s eligibility for financial products such as insurance, mortgages, and venture project financing. The financial institution evaluates the risk and potential return on investment, and may charge fees. Underwriters also consider the impact on existing clients and may choose not to underwrite high-risk applicants. Subscription is another means of financing projects, and insurers weigh factors such as marketability and profitability.
Underwriting is the method used to assess a customer’s current eligibility to receive some type of financial product. The product range includes a number of financial devices, such as insurance coverage, mortgages for home and business properties, venture project financing, or a line of credit. By going through this evaluation process, the financial institution will determine if the transaction has a good chance of generating a benefit in exchange for financial assistance.
When a financial provider such as a bank or insurance company chooses to underwrite, two events are expected to occur. First, the lender or insurer is indicating that it believes in whatever project the borrower wishes to finance, and is continuing with the financial support that is requested. Second, by underwriting the mortgage, insurance policy, or business, the lender anticipates a return on the investment at some point in the future. The repayment can be made in incremental payments or as a lump sum at a later date. Finance charges or some other type of compensatory fee, such as a premium, are typically included in any form of underwriting activity.
Insurers do not only consider the degree of risk associated with the applicant. In addition to taking steps to ensure the potential client’s ability to honor their part of the agreement, the underwriter will also consider the degree of risk that establishing this new partnership might pose to other clients of the firm. Developing standards for acceptance helps minimize the chance that the business will be damaged in any way to the point of not being able to meet commitments to existing customers.
Insurance is an example of a field that uses underwriting as a core business function. In the case of health insurance, the provider will thoroughly investigate the current and past health of the applicant, within the applicable terms. In some cases, the provider may have some reservations due to a past medical incident, but choose to insure the applicant, with some pre-existing conditions omitted from coverage for a period of time. At other times, the medical history may indicate a degree of risk that is not acceptable to the company, and the provider will choose not to underwrite the health coverage. By not insuring people who have a high probability of requiring extensive long-term medical coverage, the provider is able to maintain a more stable financial footing and continue to serve other clients.
Subscription is also a common means of financing specific projects or ventures, such as a company that has developed and wants to commercialize a new technology. In general, the insurer will weigh various factors, such as the marketability of the new product, the marketing plan developed by the applicant, the costs associated with producing and marketing the products, and changes to obtain a net profit on each unit sold. The insurer may wish to receive shares in the company as part of the compensation package, or simply receive a fixed interest rate on the advanced financial assistance amount.
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