Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions

Chapter 23Risk Underwriting – Strategy and Governance

Risks are broadly divided into two categories: those which the bank or insurer chooses to manage in order to create shareholder value (most frequently market, credit and insurance risks) and those that are undesired risks but unavoidable (most frequently operational and reputational risks).

Developing best-in-class underwriting skills for the former is the foundation of good risk management: the transactions underwritten today will form the basis for the firm's earnings for many years in the future and there is no amount of risk management after the fact which can make up for the earnings drag of a poorly underwritten portfolio.

This chapter describes what a “good” risk underwriting strategy and organization looks like; Chapter 24 describes the analytical tools used for underwriting and pricing.

Underwriting Context

There are many definitions of underwriting, some of which are narrowly focused, for example only on the decision to accept or decline a loan or insurance policy.

• “Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage or credit).” (Wikipedia.com)
• “To set one's name to (an insurance policy) for the purpose of thereby becoming answerable for a designated loss or damage on consideration of receiving a premium percent: insure on life or property; also: to ...