From credit limit application to decision- what does the underwriting process entail?

Insight by Sam Ashdown (Avenue’s Senior Credit Analyst)

One of the most common questions we are asked by our clients is how credit insurers reach decisions on credit limit applications they make under their policy.  All insurers have slightly different systems, processes, and procedures but the insights I share here will provide a useful round-up and provide more insight for those who want to know more.

Once a credit limit application has been entered using the insurer’s online portal, there are 4 immediate possibilities:

1. the limit is issued in full
2. the limit is reissued at the same level previously held
3. the limit is declined
4. the limit is referred

In the case of options 1-3, your application will have been looked at by an insurers automatic underwriting system and your decision is based on parameters set by either an underwriter when a business’s credit file is reviewed or by their automatic underwriting programme which will assess the latest available information the insurer holds and set a risk appetite based on this alone.  Insurers have made great progress in recent years developing and refining algorithms to reduce the need for human intervention but also allow instant decisions.  From experience, up to 85% of all credit limit decisions can be made instantly.

Option 4 means your application has been referred to an underwriter for a manual review, this happens for a wide range of reasons and is not necessarily an indicator that the limit is likely to be declined.

What happens to a referred decision?

At this point the underwriter will review the details of your application against the information held on file and make a judgement as to whether further information is required.

The relevance of latest filed Statutory Accounts in determining risk appetite is declining and in the current climate it is increasingly likely you may be asked to provide evidence of a need for the limit, and therefore evidence of firm orders & outstandings may be requested. If you have up to date management accounts for your customer, subject to having permission, it always worth providing these to the insurer from the outset.

Underwriters now more than ever, will want to base their decision on the most recent information possible and providing it up front may streamline the process.

We are often asked the merit of providing the information when the figures don’t look good. The fact is that bad information is better than no information. Underwriters are generally sympathetic to what UK businesses have been through over the past 18 months and will always review information with this is mind. But not having information to review is a major red flag and will likely result in a delayed decision while they request it themselves or in a worst-case scenario the decision being declined.

Importantly, Avenue endeavours to facilitate an open dialogue and partnership with your insurer and is a firm advocate of sharing information in order to get to the desired result.

Each underwriter will consider limits within their own underwriting authority. Generally speaking, the bigger the limit, the higher up the organisation the decision is ultimately made.

When reviewing the information, the underwriter will pull information from a range of sources and long gone are the days when decisions are made based on financials alone. While they may reach out to the buyer to request further financial information, now more than ever, non-financial factors are also used to contextualise a business’s performance. These include:

1. Sector outlook
2. COVID impact
3. Brexit Impact
4. Any outstanding repayment plans/CCJ’s/ claims on file
5. Confidential discussions with the buyer themselves
6. Risks to the supply chain up and downstream
7. The buyer’s customer base
8. Payment Performance Data sourced from internal or external sources

The additional analysis of factors such as these goes some way to explain the delay between a referral and a decision.

Any referred decision will ultimately end up with one of the first 3 outcomes listed above.

What happens if you do not get the decision you want or expect?

There are times when a decision feels unjust, or unintelligible. Avenue Insurance Partners can work with you to assess the merit of appealing a decision and advise on the best way to present this to any of the insurers. Having a former Senior Underwriter in the team gives us a unique insight into the insurer’s way of thinking, and we can use this knowledge of underwriting to make the strongest case possible on behalf of our clients with a view to getting decisions improved or overturned.

It may also be the case that your insurer has included additional conditions to your limit in order to mitigate their own risk; we will ensure the impact of this is fully understood, and again work with you and the insurer should you feel any of the conditions are unduly onerous or unacceptable.   

Just finally, this is a general guide and the exact process may vary by insurer, policy type and the market in which the end buyer is located.  Please contact me if you require any further insights into how a specific insurer evaluates credit risk.