Underwriting is a critical function in both the banking and insurance industries. It is one of those functions that may be taken for granted and viewed simply as having the essential purpose of risk avoidance. With the recent challenges in the financial industry, however, risk tolerance levels have generally decreased, which can result in lost revenue. As a result, it has become more important to maximize the effectiveness of the function. In addition to adjusting risk policy and tolerance levels, there are many other ways to do this.

Balance Staff to Workload and Prioritize

With customer experience a key differentiator in financial services, along with new and evolving distribution channels, customer expectations relative to things like turnaround time are changing as well. Customers expect quick or immediate decisions in many cases, so for applications that cannot go through an automated risk assessment process, it is imperative that underwriting staff be available when needed by the sales side and that staffing levels be aligned with peaks and valleys in volume. Guidelines and processes should be established for loans that can be decisioned quickly and when a customer is present so that they are prioritized within the underwriting shop from a work distribution perspective.

Understand Customers and Relationships

While it's important to monitor the front-end risk-oriented information (such as the credit score), a poor understanding of an individual's or business's past, present, and future, and their overall relationship with the organization can result in a short-sighted credit decision. With this information, underwriters may, for example, modify decisions in order to ensure that a long-term, profitable customer relationship is maintained.

Balance Performance Metrics

The goals and performance metrics for the underwriting function should go beyond the traditional risk-oriented performance indicators, such as charge-offs, default rates, and non-performing assets. They should include turnaround time, unit cost, and revenue growth. It is critical that these metrics be balanced appropriately and aligned with the organization's strategy, risk policy, customer expectations, and the competitive market. For effective evaluation of individual and team success, underwriters should have a stake in profitable sales growth that is appropriately balanced with risk-oriented metrics. If not already available, tools should be developed and put in place that will enable underwriters to see the big picture from a client perspective, which will prompt them to be proactive about providing valuable insights for the sales staff from a cross-sell or up-sell perspective.

Automate

Automation is a key component of underwriting efficiency. The two areas that can provide the most gains in efficiency and effectiveness are automated underwriting and automated workflow. The degree to which these processes are automated can vary between organizations. Automated underwriting requires that criteria be established that will reduce manual volume and human intervention, while balancing this with appropriate levels of risk and the competitive environment. The primary benefits include reduced cost and immediate turnaround. If not already in place, automated work distribution and workflow of applications and trailing documents can provide significant benefits. Applications should ideally be accompanied by electronic images of all training documents.

Apply Business Analytics

Monitoring ratios and underwriting result trends through analytics is a must for underwriting effectiveness. Effective management of the function requires ongoing monitoring and awareness of various statistics at the product, department, and individual levels, such as:

• Application volumes by type
• Approval and decline rates
• Conditional approvals and booked rates
• Withdrawal rates and percent of applications booked
• Turndown percentages for A and A+ credit rating applicants
• Revenue and client retention trends
• Automated underwriting trends

These concepts are generic enough to apply to insurance or banking and across product lines. They will help to ensure that the underwriting function goes beyond risk management to provide maximum value from a profitability perspective.