Underwriters play a crucial role in the insurance industry, serving as the backbone of risk assessment and management. Their expertise ensures that insurance companies can confidently offer coverage while maintaining financial stability. This blog explores the fundamental role of underwriters and dives into the various types of underwriting, including life, health, and property underwriting. Understanding these roles not only sheds light on the intricate workings of insurance but also highlights the importance of underwriters in safeguarding individuals and businesses against unforeseen risks.
Who are Underwriters? | Job Roles and Responsibilities
The term underwriter came from the fact that the person or company offering the guarantee signed at the bottom of the page, under the legal statement specifying the guarantee and all associated provisions, exclusions, etc.
Underwriters are the one who understands the risk factor and defines its prevention. An underwriter reviews the risk of a specific venture or proposition and decides whether or not to accept guaranteeing the payment of that risk for a fee. That venture could be minimally risky, like Life insurance for a healthy 28-year-old man, or as risky as insuring coverage on the next version of the space shuttle.
There are many different types of underwriting, including:
- standard health insurance for a typical family or the employees of a company
- insuring the cargo being transported by truck, ship, or plane
- guaranteeing mortgage loan payments to a financial institution in case of default by the person who took out the loan
- worker’s compensation insurance for dealing with workplace injuries and accidents
- stock and other financial instrument offerings
The basic responsibilities of the underwriter are as follows:
- A professional reviews the specific information to determine the actual risk of policy.
- Underwriters are authorities to restrict or alter the coverage by endorsement.
- The underwriter looks for different proactive solutions that might minimize or eliminate the risk of future claims.
- An underwriter is liable to get involved when the intervention or additional assessment is required in situations like:
- There are several claims
- In the case of the first insurance
- If payment issues persist
Underwriters use their knowledge of the insurance market to evaluate the potential risk of an applicant and determine whether or not to provide coverage.
They also work with insurance agents and brokers to provide advice on coverage options, limitations, and availability.
Roles and Responsibilities of an Underwriter
Underwriters play a vital role in evaluating the risk presented in loan applications. As mentioned by Finance Strategists, underwriters determine the level of risk associated with different types of lending opportunities. They may work directly for companies that are in the business of making loans, or they may be employed by insurance companies that protect against specific types of financial loss. For example, an underwriter at a life insurance company might determine which applicants will be approved for coverage, based on their age, family history, and state of health.
The underwriter assesses your proposal and your eligibility for the cover to be provided. There are two underwriting principles –
- Financial underwriting – assuming that you are opting for a life cover of 1 crore, a financial underwriting process would check your current income and professional status for 1 crore cover. The idea is that you should be able to pay off the premia on time and that you are not covered for a large sum disproportionate to your current income, you never know how an individual can misuse this.
- Medical underwriting– while providing you with a cover a medical underwriter would assess your medical conditions by subjecting you to medical scrutiny through a medical practitioner or lab tests. The idea is that at the time of accepting your proposal, the individual should be fit enough. After all no company wants to lay a claim 🙂
An underwriter’s job is to make sure that the life proposal accepted by them will have the least probability of turning into a claim. Insurance underwriters are supposed to:
- accept or reject risks
- propose appropriate terms and conditions for the accepted risks
However, because of their human nature and personal interest (keeping the job) sometimes not being fully aligned with the company goal, when facing strong competition, they tend to vitiate both risk acceptance and terms & conditions, given the delayed nature of results in the insurance business.
The underwriter on an IPO (or indeed a secondary raising) will typically be a large investment bank, or often a syndicate of banks (called joint bookrunners). The capital raising will comprise a specified number of shares in the company representing a proportion of total ownership.
The bookrunner/s does not buy the shares from the issuer in advance of the IPO, but rather underwriting the transaction represents an agreement that the bank/s will purchase any shortfall (i.e. any proportion of the raising that is not covered) from the issuer at the issue price. Their role is to build the book i.e. to source out an appropriate mix of investors that will cover the shares to be issued. Key considerations in this process include trying to get the highest price possible as this
a) raises a higher amount of capital for the issuer, but also
b) increases the commission paid to the bookrunner/s. This needs to be balanced against trying to have the right mix of buyers to improve the quality of the secondary market.
Usually, as an institutional investor you have the opportunity to bid into the bookbuild, indicating that you are willing to buy X shares at one price, Y shares at a higher price (where Y<X) and so on. Some investors may be locked up as cornerstone investors, which carries an agreement that they won’t sell any shares for an agreed period.
As you have noted underwriting comprises a fair degree of risk for the bookrunner/s. To help manage this risk they will frequently engage in sub-underwriting agreements with their institutional clients – this is somewhat similar to reinsurance. Essentially the institution will agree to purchase a specified number of shares from the bookrunner at the issue price if there is a shortfall – this is rare for an IPO (as it would just be priced to clear!) but does happen from time to time with secondary raisings where the market remains active. Essentially the institution is short a put option on the stock with the issue price representing the strike.
In return for agreeing to sub-underwrite the deal the institution will be paid a premium upfront, as well as usually an additional premium on exercise should the stock not be cleared (referred to as getting hit).
What are some of the hard skills needed in an Underwriting role?
Communication, time management and critical thinking are the skills needed for this role. You don’t need to know anything more than basic Microsoft Office skills when it comes to computer literacy. Apart from formal higher education (whether technical, economic or law, depending on the area you cover), you will need to make sure this is the right path for you.
- If you like spending time with people, sales could be a choice.
- If you like seeing the actual risks and losses, you can choose claims, risk management or loss adjusting/assessing.
- If you love dreaming about piles of figures and tables, actuary.
- If you have a good imagination can foresee what could go wrong with a risk, willing to see new things every day, an underwriter might be a good choice.
It takes at least 3 years to reach a reasonable level of knowledge — the first year you get accustomed to the portfolio, the second year you run it and by/after the third year you are really in the heart of the business.
Insurance companies look for the following points:
People Skills
They want you to build relationships because you’re reliant on your brokers to bring you business. So, being able to hold a conversation with a stranger, find out their pain points and deliver on your word is crucial. Oh yeah, and you need to be able to work with people who are upset and work through that dynamic.
Analytical Prowess
For as much as insurance is reliant on data, it’s an inexact science because you’ll never get 100% of the information that you’d like. You need to be able to demonstrate your ability to make intelligent decisions based on what you know and what you don’t know.
Excellent Time Management
Just like seemingly everybody else in the world, everyone’s taking on a bigger workload. It can get pretty busy as an insurance underwriter, and there will be times when you have to balance far too many things at once. How do you prioritize? Can you handle the pressure of tight deadlines? How you respond in those situations will be very telling of how you are in this business.
A Willingness to Learn
It’s highly unlikely that a new underwriter will come in with all the knowledge necessary to be a great underwriter from day one. You’ll greatly increase your chances of succeeding in underwriting if you can dedicate yourself to learning all you can about the industry. Having some designations beforehand (CPCU, RPLU, ARM, CIC) puts you in a great position to go in with some momentum and give the employer confidence that you’re invested in your future as an underwriter.
Steps to Become an Underwriter
Step 1: Earn a Bachelor’s Degree
Some students choose to pursue a degree in financing or business administration or another related program, such as a Bachelor of Science in Insurance. Other students acquire an education in business law or accounting.
Students aspiring to work as life insurance underwriters should volunteer or work part-time in an insurance company. Students can learn about the insurance industry, as well as develop their skills while working on their undergraduate degrees. The acquired knowledge can be an asset when applying for a permanent position. Students should also consider work or co-op programs for college students offered by some insurance companies.
Step 2: Get Work Experience
Recent college graduates may want to consider entry-level jobs to gain more work experience before applying for more complex positions. By starting in entry-level jobs, such as insurance policy processing clerks and procurement clerks, candidates can learn about the insurance industry, acquire skills in using computers and develop their analytical and reasoning abilities for more complex work.
Step 3: Complete Training
Job training is typically a requirement of all trainees or assistants starting in the underwriting business. Candidates who have acquired insurance experience or received a degree can work as a trainee under the supervision of an experienced worker, helping them to perform routine research and applications. During this time, a life insurance underwriter also studies more complex claim files.
Step 4: Obtain Certification
Most employers expect insurance underwriters to obtain certification. Through the coursework required for certification, new employees stay up-to-date on changes within insurance industry policies and standards, especially as they may apply to federal and state regulatory requirements. Introductory certification is offered through organizations that include The Institutes and the American College.
These organizations also offer continuing education courses for underwriters participate in continuing education. Because of various changes that regularly impact the insurance industry, it can be beneficial to continue training.
Step 5: Gain Experience
Insurance underwriters learn and obtain new skills on the job. With enough experience, promotion to a senior position or management position, which may involve mentoring, training, or managing the performance of newer employees, is possible for underwriters who demonstrate leadership ability.
Life insurance underwriters use specific criteria to assess the risks of providing insurance coverage to individuals seeking a policy. A bachelor’s degree in a relevant field is preferred by employers, though experience may be enough for employment. As of 2015, insurance underwriters earned a median wage of just over $65,000 annually.
How much does an Underwriter earn?
The average salary for an Underwriter in India is approximately ₹5,97,604 per year, with the highest salary being around ₹9,34,713 per year and the lowest around ₹4,22,478 per year. Salaries can vary based on experience, location, and the employing company’s policies. Entry-level positions typically range from ₹3 to ₹5 lakhs per annum.
The average base salary for an insurance underwriter trainee is ₹3,05,840 per year, while the average base salary for a licentiate underwriter is ₹8,31,125 per year. These figures indicate that underwriters in India have the potential to earn competitive salaries, with variations based on different factors.
Some of the top companies hiring underwriters in India include:
- MPOWER Financing- Average Salary: ₹8,20,243 per year
- ICICI Lombard- Average Salary: ₹7,47,979 per year
These companies are known for offering competitive salaries to underwriters in India. The average salary for an underwriter in India is approximately ₹5,97,604 per year, with the highest salary being around ₹9,34,713 per year and the lowest around ₹4,22,478 per year.
Salaries can vary based on experience, location, and the employing company’s policies.
Career as an underwriter
Educational rеԛuіrеmеntѕ mау vаrу slightly depending on the company, thе аrеа уоu wіѕh tо wоrk and уоur рrеvіоuѕ wоrk еxреrіеnсе.
Fоr mоѕt Undеrwrіtеr careers, the mіnіmum еduсаtіоnаl requirement is thе соmрlеtіоn оf a Bасhеlоr’ѕ dеgrее. Mоѕt еmрlоуеrѕ look fоr degrees іn business аdmіnіѕtrаtіоn or ассоuntіng. Hоwеvеr, a bachelor’s degree in any field should get уоur foot іn thе door if уоu hаvе wоrk еxреrіеnсе in thе іnѕurаnсе іnduѕtrу.
If you аrе іntеrеѕtеd іn аdvаnсіng your career аѕ quickly as роѕѕіblе by moving into managerial роѕіtіоnѕ, уоu wіll tурісаllу bе required tо еаrn a Mаѕtеr’ѕ dеgrее оr MBA іn Aссоuntіng оr Business Admіnіѕtrаtіоn. It’s a great career and there is some serious money in the larger policies, reinsurance and niche market. Consider getting the AU designation and then also consider learning about the actuarial side which is useful if you want to get into reinsurance. In my experience, most underwriters came from other fields. A very common one is marketing. One path can be from an agency as an agent. It is helpful to begin courses of study as a Chartered Property Casualty Underwriter, CPCU, Chartered Life Underwriter, CLU, or Professional Liability Underwriter, PLU. Many employers pay for these courses in addition to licensing courses. Some care needs to be taken as some companies are leery of hiring agents from agencies. Some are concerned that agents often tend to have a higher tolerance for risk. Some worry that the agency (who distribute their product) may resent poaching of employees. Many insurance underwriters start their career in the marketing department. A less frequent path is through claims. Claim representative jobs are generally just as competitive as underwriting. However, auto physical damage adjuster jobs come up somewhat more frequently.
Other paths can come from premium audit and loss control. These are field positions and may be with an insurance company but more often will be through a contractor.
Is a career as an underwriter right for you?
If you are analytical, detail-oriented, and enjoy working with numbers, then a career as an underwriter could be a good fit for you. It is also a stable career with good earning potential. However, it is important to be aware that underwriting can be a demanding job, and it requires a lot of attention to detail.
Here are some additional things to consider if you are thinking about a career as an underwriter:
- What type of underwriting are you interested in? There are many different types of underwriting, so it is important to do your research and find one that interests you.
- What is the educational background required? Most underwriters have a bachelor’s degree in business, finance, or a related field. Some employers may also require specific certifications.
- What are the career advancement opportunities? Underwriters can advance to more senior positions, such as underwriting manager or chief underwriting officer. They can also move into other areas of finance, such as risk management or investment banking.
The types of underwriting include loans, securities, and insurance. Loan underwriting involves assessing the risk of lending money, securities underwriting involves evaluating the risk of funding an initial public offering (IPO), and insurance underwriting involves evaluating the risk of insuring properties such as homes, cars, or individuals seeking life insurance policies.
Each type of underwriting plays a crucial role in the financial industry, helping to determine the level of risk for individuals or institutions and assisting in making profitable investment decisions.
Conclusion
In conclusion, a career as an underwriter is more than just a job; it’s a vital responsibility that contributes to financial stability, protects individuals and businesses, and offers personal and professional growth. If you enjoy analytical work, possess sound judgment, and thrive in a dynamic environment, then underwriting could be your ideal path to a fulfilling and impactful career.
Underwriting plays a crucial role in various financial sectors, serving as the gatekeeper of risk and stability. As an underwriter, you are not just analyzing numbers and documents; you are making informed decisions that impact individuals, businesses, and the overall financial landscape.
Here are some key takeaways to remember:
- Your expertise ensures responsible allocation of resources: Your risk assessments help ensure loans, insurance, and investments are distributed to suitable applicants, minimizing financial losses and protecting both the institutions and the beneficiaries.
- Your decisions contribute to market stability: By carefully evaluating risks, you promote a healthy financial ecosystem where responsible investments thrive and reckless ventures are contained.
- Your skills are valuable and in demand: The increasing complexity of financial instruments and growing awareness of risk management solidify the need for skilled underwriters.
- Your career offers growth potential: With experience and expertise, you can advance to managerial roles, specialize in different areas of underwriting, or even transition to related fields like finance or risk management.
Underwriters play a critical role in determining the level of risk for individuals or institutions and assisting in making profitable investment decisions. They work for various financial organizations, including mortgage, insurance, loan, or investment companies, and their primary task is to assume the risk of another party for a fee. Successful underwriters must possess strong analytical thinking, problem-solving, and communication skills, as well as a high level of attention to detail.
