# Underwriting Explained: Types, Processes, and Benefits

> **Definition**
>
> Underwriting is typically conducted by insurance companies, investment firms, and banks to measure and calculate financial risk for insurance policies, investment securities, and loans. This process determines whether the institution will accept the risk at a determined price in the form of premiums or interest rates or establish the underlying value for an initial public offering (IPO). 

## What Is Underwriting?

Underwriting is a key financial process where individuals or institutions assume [financial risk](https://www.investopedia.com/terms/f/financialrisk.asp) for a fee, primarily in loans, insurance, and investments. Originating from historical practices of risk acceptance for premiums, modern underwriting continues to be vital in accurately pricing risks, securing investment markets, and establishing fair rates and premiums. This risk usually involves loans, insurance, or investments. The term "underwriter" comes from the practice of risk-takers writing their names below the amount of risk they would accept for a given premium.

While the process of underwriting has evolved, it remains crucial in the finance and insurance sector. The best companies that offer [mortgage loans](https://www.investopedia.com/the-best-mortgage-lenders-11714101), [health](https://www.investopedia.com/the-best-health-insurance-companies-8762191), and [life insurance](https://www.investopedia.com/the-best-term-life-insurance-8764257) will have an efficient and transparent underwriting process when determining the risks of potential clients.

### Key Takeaways

*   Underwriting involves evaluating and taking on financial risk for a fee, most commonly in loans, insurance, or securities.
*   The underwriting process assesses risk to set fair loan rates, determine appropriate insurance premiums, and establish market prices for securities.
*   Underwriters can deny applications or recommend higher rates if risks are deemed too high, while ensuring compliance with anti-discrimination laws.
*   Different types of underwriting include loans, insurance, and securities, each with its own process and focus on assessing different risk factors.
*   Technological advancements have shortened the underwriting process, sometimes reducing it to just a few hours or days.

![Illustration of a person suspended in a funnel above stacks of coins depicting underwriting and financial risk assessment process](https://www.investopedia.com/thmb/hC6eXM1QpaBBTsvwtAM_zR9OzRc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/underwriting-4187414-1-faf1d6b3110546b6a4e351c51f6db84b.jpg)

*— Investopedia / Joules Garcia*

## The Process of Underwriting Explained

Underwriting means researching and assessing the risk each applicant or entity presents before accepting it. This check helps to set fair borrowing rates for loans, establish appropriate [premiums](https://www.investopedia.com/terms/i/insurance-premium.asp) to adequately cover the true cost of insuring policyholders, and create a market for [securities](https://www.investopedia.com/terms/s/security.asp) by accurately pricing investment risk. An underwriter may deny coverage if the risk is too high.

[Risk](https://www.investopedia.com/terms/u/underwriting-risk.asp) is the underlying factor in all underwriting. In the case of a loan, the risk is whether the borrower will repay the loan as agreed or will default. With insurance, the risk may involve the likelihood that an individual prospective insured might file a claim, or that too many policyholders will file claims at the same time. With securities, the risk is that the underwritten investments will not be profitable.

Underwriters assess loans, especially mortgages, to ensure borrowers will repay them and have enough [collateral](https://www.investopedia.com/terms/c/collateral.asp) in case of [default](https://www.investopedia.com/terms/d/default2.asp). In the insurance industry, underwriters seek to assess a policyholder's health and related factors, a driver's safety record, or the security of a home. They set insurance premiums properly and spread the potential risk among many people. Underwriting securities, most often done via [initial public offerings](https://www.investopedia.com/terms/i/ipo.asp) (IPOs), helps determine the company's underlying value compared to the risk of funding its IPO.

## Understanding Different Underwriting Types 

There are three major types of underwriting: loans, insurance, and securities.

### Loan Underwriting

All loans undergo some form of underwriting. In many cases, underwriting is [automated](https://www.investopedia.com/terms/a/automated_underwriting.asp), It involves appraising an applicant's credit history, financial records, and the value of any collateral offered, along with other factors that depend on the size and purpose of the loan. The appraisal process can take a few minutes to a few weeks, depending on whether the appraisal requires a human being to be involved.

The most common type of loan underwriting that involves a human underwriter is for [mortgages](https://www.investopedia.com/terms/m/mortgage.asp). This is also the type of loan underwriting that most people encounter. The underwriter assesses income, liabilities (debt), savings, credit history, credit score, and more, depending on an individual's financial circumstances. Mortgage underwriting typically has a turnaround time of a week or less.

[Refinancing](https://www.investopedia.com/terms/r/refinance.asp) often takes longer because buyers who face deadlines get preferential treatment. Although loan applications can be approved, denied, or suspended, most are [approved with conditions](https://www.investopedia.com/what-is-a-conditional-mortgage-approval-8653888), meaning the underwriter wants clarification or additional documentation before the agreement can be finalized.

### Insurance Underwriting

Insurance underwriters receive customer applications and decide whether to offer them a policy on the basis of various criteria. If they do approve the application, the underwriters also set premiums and coverage amounts.

With insurance underwriting, the focus is on the potential policyholder—the person seeking health, home, auto, or life insurance. In the past, medical underwriting for [health insurance](https://www.investopedia.com/terms/h/healthinsurance.asp) looked at the applicant’s pre-existing conditions to determine how much to charge an applicant, or whether to offer coverage at all, often based on the applicant’s pre-existing conditions. Beginning in 2014, under the [Affordable Care Act](https://www.investopedia.com/terms/a/affordable-care-act.asp), insurers were no longer allowed to deny coverage or impose limitations based on pre-existing conditions.

Life insurance underwriting seeks to assess the risk of insuring a potential policyholder based on their age, health, lifestyle, occupation, family medical history, hobbies, and [other factors](https://www.investopedia.com/articles/investing/102914/7-factors-affect-your-life-insurance-quote.asp) determined by the underwriter. Life insurance underwriting can result in approval—along with a range of coverage amounts, prices, exclusions, and conditions—or outright rejection.

For property and casualty insurance, underwriters look at numerous criteria, including characteristics of the person and the property being insured. For example, if someone applies for [automobile insurance](https://www.investopedia.com/terms/a/auto-insurance.asp), the carrier looks at their driving record, how often their make and model of car is in an accident, and the average cost of repairs. Similarly, to ensure a home, underwriters focus on such factors as replacement cost, age of the dwelling, and any significant risks (such as being in an area prone to wildfires or hurricanes) to decide whether to offer the applicant [homeowner's insurance](https://www.investopedia.com/terms/h/homeowners-insurance.asp) and how much to charge.

### Securities Underwriting

Investment securities underwriting, which seeks to assess risk and the appropriate price of particular securities—most often related to an IPO—is performed on behalf of a potential investor, often an investment bank. Based on the results of the underwriting process, an [investment bank](https://www.investopedia.com/terms/i/investmentbank.asp) would buy (underwrite) securities issued by the company attempting the IPO and then sell those securities in the open market.

Underwriting ensures that the company's IPO will raise the capital needed and provides the underwriters with a premium or profit for their service. Investors benefit from the [vetting](https://www.investopedia.com/terms/v/vetting.asp) process that underwriting provides and its ability to make an informed investment decision.

This type of underwriting can involve individual stocks and debt securities, including government, corporate, or municipal bonds. Underwriters or their employers purchase these securities to resell them for a profit either to investors or dealers (who sell them to other buyers). When multiple underwriters are involved, it's called an [underwriter syndicate](https://www.investopedia.com/terms/u/underwriter-syndicate.asp).

## Timeframes for the Underwriting Process

The time frame for underwriting varies among different investment products, as the underwriter will have to spend some time examining the risk profile of each investment. Underwriting personal loans and insurance is typically simpler than securities. However, underwriting periods for mortgages and insurance can vary by state.

### Personal Loans and Mortgages

Algorithms often handle car loans by comparing applicants to similar borrowers. This process takes only a few days at most, and, in some cases, it is almost instantaneous. Home mortgages tend to take longer because the underwriter will need to verify the borrower's income, employment, and credit history, which can take some time. Full approval for a home loan can take up to 45 days, although the underwriting process itself accounts for only a small part of this time. The underwriting process can last from a few days to a few weeks.

### Insurance

Underwriting insurance is similar to underwriting a loan, except that the insurers weigh the probability and size of the average claim compared to the premiums that they expect to collect. In the case of property and auto insurance policies, this is based on factors like the age of the insured, their geographical location, and their past history of making claims. For homeowners and commercial property coverages, they must avoid a large concentration of risks in the same geographic area, as a catastrophic event (such as a hurricane) would mean huge losses for the company.

Those [applying for a life insurance policy](https://www.investopedia.com/articles/pf/08/what-to-expect-insurance-application.asp) can expect a more complicated process because they also account for the insured's medical history and other personal details. Underwriting life insurance can also take a month or longer, although most decisions are issued in a few days.

### Stocks and Bond Issues

Securities are the most complicated products to underwrite. When a company issues a bond or a stock offering, the underwriter ([usually an investment bank](https://www.investopedia.com/ask/answers/060115/what-difference-between-investment-and-retail-bank.asp)) examines the company's accounts, cash flows, assets, and liabilities, and checks for any discrepancies. This can take anywhere six to nine months.  

## Key Information Underwriters Examine

Whether they are lending money or providing insurance, underwriters examine the financials of each applicant to determine how much risk they are taking on and the likelihood of losing money. This is generally done by comparison to historical data: If applicants with a similar risk profile tend to default X% of the time, then the premiums or interest rate will be priced at a rate that assumes an X% probability of default.

Underwriters for personal loans and insurance review the applicant's available data. For loans, they might examine the borrower's income, savings, employment status, and credit history. Underwriters will also assess the capacity for repaying the loan and the value of any assets that are used for collateral. For life insurance, they might also look at medical history plus such risk factors as dangerous hobbies, hazardous occupations, and smoking or drinking habits.

[Securities underwriters](https://www.investopedia.com/ask/answers/041415/what-does-underwriter-do-new-stock-offering.asp) will look at the financial situation of the issuer, such as their income statements, cash flow, debts, and any other potential liabilities, before pricing a bond or stock issue. They will also examine the issuer's [credit rating](https://www.investopedia.com/terms/c/creditrating.asp), the institutional equivalent of a personal credit score.

## Role of Underwriting in Market Pricing

Creating a fair and stable market for financial transactions is the chief function of an underwriter. Every [debt instrument](https://www.investopedia.com/terms/d/debtinstrument.asp), insurance policy, or IPO carries a certain risk that the customer will default, file a claim, or fail—all sources of potential loss to the insurer or lender. A big part of the underwriter's job is to weigh the known risk factors and investigate an applicant’s truthfulness to determine the minimum price for providing coverage.

Underwriters help establish the true market price of risk by deciding on a case-by-case basis which transactions they are willing to cover and what rates they need to charge to make a profit. Underwriters also help expose unacceptably risky applicants—such as unemployed people asking for expensive mortgages, those in poor health who request life insurance, or companies that attempt an IPO before they are ready—by rejecting coverage.

This vetting function substantially lowers the overall risk of expensive claims or defaults. It allows loan officers, insurance agents, and investment banks to offer more competitive rates to those with less risky propositions.

## What Is the Purpose of Underwriting?

Underwriting, whether for an insurance policy or a loan, evaluates the riskiness of a proposed deal or agreement. For an insurer, the underwriter must determine the risk of a policyholder filing a claim that must be paid out before the policy has become profitable. For a lender, the risk is of default or non-payment. Similarly, securities underwriting by investment banks evaluates newly issued shares and bonds to determine their risk-adjusted value.

## Where Did the Word Underwriting Come From?

The term "[underwriter](https://www.investopedia.com/terms/u/underwriting.asp?state=PREVIEW&et=1757347434084&kw=fakeAds)" originated in the 17th century when marine vessels would be underwritten for insurance risk for overseas voyages. The insurance company would sub-scribe (literally to write underneath or under-write) the policy by signing their name at the bottom of the document and acknowledging consent that the policy is in force.

## What Is the Underwriter's Role?

An underwriter is a financial professional who researches and assesses the financial risk of a potential insurance policy, security, or loan to determine whether an institution should take on the risk and, if so, how much it should charge to ensure a profit.

## Can an Underwriter Deny an Insurance Policy or Loan?

Yes, if the riskiness of a borrower or insurance policy applicant is deemed too great, the underwriter can either recommend higher rates or deny the application entirely. They must also ensure state and federal compliance is followed, that they do not break any anti-discrimination laws, and that they only evaluate objective risk metrics.

## How Long Does the Underwriting Process Take?

With the advent of information technology, the underwriting process for insurers and lenders has shortened from a matter of weeks or months to just a few days or even hours in some cases. The time frame varies by the type of instrument being underwritten and any applicable state regulations.

## The Bottom Line

Underwriting plays a critical role in the financial landscape by evaluating the risk associated with loans, insurance, and securities. It involves assessing an applicant’s financial history, including income, assets, and creditworthiness, to set fair rates and ensure financial institutions can manage potential losses. Through underwriting, fair borrowing rates, appropriate insurance premiums, and accurate investment pricing are established, supporting both financial institutions and consumers in making informed economic decisions.  

> **Article Sources**
>
> 1.  U.S. Bureau of Labor Statistics. "[What Insurance Underwriters Do](https://www.bls.gov/ooh/business-and-financial/insurance-underwriters.htm#tab-2)."
>     
> 2.  U.S. Department of Health and Human Services. "[Pre-Existing Conditions.](https://www.hhs.gov/healthcare/about-the-aca/pre-existing-conditions/index.html)"
>     
> 3.  Rocket Mortgage. "[How Long Does Underwriting Take?](https://www.rocketmortgage.com/learn/how-long-from-underwriting-to-closing)"
>     
> 4.  Finance Strategists. "[Underwriting](https://www.financestrategists.com/mortgage-broker/underwriting/)."
>     
> 5.  U.S. Bank. "[Your Guide to the Mortgage Underwriting Process](https://www.usbank.com/home-loans/mortgage/first-time-home-buyers/mortgage-underwriting-process.html)."
>     
> 6.  Guardian Life. "[Life Insurance Underwriting: What To Expect](https://www.guardianlife.com/life-insurance/underwriting)."