Underwriting

Underwriting means deciding whether to take on a risk, and at what price. A lender underwrites a loan: it decides whether the borrower will repay, and what interest rate to charge. An insurer underwrites a policy: it decides whether to insure something, and what premium to charge. The person or software that makes the decision is called an underwriter.

Here is how it works. An applicant asks for a loan or a policy. The underwriter collects data about the applicant and the risk. For a loan, this is usually the credit score, bank statements, income and identity. For insurance, it may be the person's age and health, or the location and condition of a building. Software such as a credit decision engine combines this data with the lender's or the insurer's own rules. It then approves or declines, and sets the price: the interest rate for a loan, or the premium for a policy. A riskier applicant pays a higher price, or is declined.

Take, for example, a bakery that wants to insure its shop. A shop near a river that floods pays a higher premium, and insurers use property risk data and satellite images to check this without visiting.

Consider two people who each apply for a ₹3 lakh personal loan. The one with a long record of on-time EMIs may be offered 12% a year, and the one with missed EMIs may be offered 18%, or refused.

Imagine someone aged 30 buying term life insurance online. Instead of sending them for a medical test, accelerated life underwriting can decide from data about their health and income.

Underwriting used to be done by people reading files. Today much of it is done by software in seconds, and a human underwriter checks the difficult cases on an underwriter workbench. When underwriting happens inside a checkout, it is part of embedded finance.

How is underwriting different from a credit score? A credit score is one input: a number about the borrower's past. Underwriting is the decision itself, which uses the score along with other data and the lender's own rules.