I’ve read every definition I can find and I’m none the wiser. In fact, I can actively feel my IQ decreasing.
I get it’s to do with risk but what does an Underwriter actually do on an average Tuesday?
Thank you!
In: Economics
They are weighing the evidence collected in the loan process and comparing it to organizational standards for data validity, confidence, and lending policy. Essentially they are checking that the calculation of “Will this person pay the loan back?” was done according to organizational standards. They are supposed to be an unbiased double-check, by someone with no financial interest in the loan being funded or not funded. The loan officer is sometimes on commission, so they make more if you get approved, and that could lead to abuses without this double-check.
On an average Tuesday, the underwriter is sitting around counting their money. Literally.
A mortgage or insurance broker’s job is to sell. They go out and find customers to make deals with. The underwriter is where the actual money comes from.
Lending to one customer is a risk, because if they can’t pay, you don’t get your money back. Insuring one person is also a risk, if they make a claim, you have to pay out more than made in premiums. Underwriters work through multiple brokers and have lots of customers, they can make money off of the good customers even if a few go bad…the risk is spread over the entire group, and that makes it more predictable. Knowing how much to charge to compensate for that risk is what underwriters do. If the rates are too low, they low money, if they are too high, they lose customers.
I’m speaking in an insurance context; I’ve worked in both personal and specialty insurance.
An underwriter is the person who looks at your application for insurance and determines whether they want to offer coverage, under what terms, and for how much.
For instance, your home insurance might be more expensive than your neighbor’s, despite being next door and having a similar-sized home. That could be because your plumbing needs to be replaced, or you have a home-based business out of your basement, or you want specialized coverage for your stamp collection. An underwriter would look at each of those factors (among many others).
And underwriter is a person who gauges financial risk and makes a decision which risks are worth taking and which ones aren’t. You most often find them in financial services like banking, investing, lending, or insurance.
Say I’m a mortgage underwriter, my job on a Tuesday is to review the loans that have been applied for by people who want to buy houses. Obviously, that’s a big decision, because hundreds of thousands of dollars (if not more) are involved, and if we lend that to the wrong person we’ll lose lots of money. I’ll review the file – the income and credit history of the borrower, the stability of their employment, etc. to see if they’re safe enough to lend a huge amount of money to. And I’ll weigh that alongside details about the home itself, it’s location, value, and area, because if the borrower defaults on their mortgage, I have to make sure that we can sell the house if needed for a decent amount. If all of that risk ends up more likely to work out than to bite me in the butt, I can approve the loan, and the bank or financial institution that I’m working with will take that risk.
Same deal with something like insurance – if a business (say, a home builder) applies for liability insurance, the underwriter will check the company’s financials, payroll, operations, and income to see what sort of rate they qualify for and how big a policy they need… or if they’re a poorly-managed business with a large history of accidents that would be too risky to insure. The underwriter will determine what exclusions go on the policy (saying it doesn’t cover fire damage, or roofing work, or whatever) to mitigate the risk that the insurance company is taking, and that’s the deal that they’ll offer to the construction company.
Underwriters are risk assessors, plain and simple. Anyone you’re giving money to or writing a contract with is a risk, because sometimes people mess up, sometimes people hit some bad luck, or sometimes they’re just trying to do something fraudulent. Underwriters determine which of those risks are worth taking and which are more likely to result in a loss for their company. Obviously they can’t know 100% what will happen – look at the situation now with COVID-19 and how many people are having trouble paying their billswith jobs stopped and companies closed down – but they can make a general assessment and give their company the best chances of only taking the safest risks.
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