Last updated on October 12th, 2022 at 07:25 am
Risks assess by underwriting teams, which are composed of experts in risk type. For example, the commercial team will determine risks related to commercial clients, while the retail group will evaluate risks for retail clients. This blog post will explore how these professionals assess risk types with a focus on defining specific terms.
Understanding these terms is vital for both people considering new lines of business and those who want to improve their current practices to analyze risk levels better and make more informed decisions about what they can offer clients.
The factors on which risk assets depends
Lending & Credit Products
Lenders use a formalized approach to assess the creditworthiness of an individual or business borrower based on their behavioral and financial history. This information collects in a credit report, which summarizes credit history over time with a scoring model that assigns a 300-850. Anything below 600 is considered subprime, and 600-700 is considered near-prime or "second chance" lending. For example, if there is a credit card user with a score of 700, they are likely to pay their monthly payment on time but may carry an unusually high balance on the card at a time when interest rates are low.
Credit reports look at certain factors that may signal higher risk to lenders, such as missed payments on loans or credit cards, requests for new credit lines, and lack of repayment history on existing lines of credit. If there is a pattern of credit denials, then the person or business may be considered less likely to repay future loans.
Credit reports also provide insight into how borrowers manage their budgets. For instance, individuals (and businesses) with high debt levels relative to their income are at higher risk because they must simultaneously make payments on multiple loans. It reduces their ability to repay all of their obligations on time.
Personal guarantors
If an individual or business doesn't have a strong enough credit history to meet the lender's criteria, they may get a loan if they secure it with collateral such as real estate. Lenders will assess this risk and determine whether the asset's value is enough to cover the total amount owed in case of default.
Credit analysis
This term comes from credit underwriters and refers to a more detailed review of the borrower's to repay a loan based on cash flow projections and other information such as documentation about assets and liabilities. These professionals typically look at all the borrower's financials, including income and living expenses.
Capital Markets Products
Products that fall into this category include bonds, stocks, and derivatives such as futures and options. For example, a corporation issues a bond with a face value of $1 million to raise capital to fund its operations. As the corporation repays the loan, that $1 million returns to bondholders. Underwriters analyze a corporation's credit history and financial documents as part of their decision to evaluate whether to issue debt (bonds).
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