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What Is Cash Flow Underwriting?

Esther Ejim
Esther Ejim

Cash flow underwriting is a tactic that is utilized by insurance companies to generate funds in the interim that will be channeled toward other revenue-based initiatives. The sole premise of cash flow underwriting is the raising of revenue by such an insurance company, a drive that may lead to a compromise of the usual quality of standard utilized by the company in its operation methods. When some insurance companies seek to achieve rapid growth within a stated business cycle, they will encourage agents to get as many clients as possible for the sake of generating funds from the premiums that will be charged to the clients.

This practice is referred to as cash flow underwriting, and it is a venture with inherent risks due to the very nature of the whole underwriting process involved. For instance, an insurance company that is bent on interim rapid growth might lower its standards for accepting clients in order to allow more people qualify for coverage under the various plans offered by the insurance company. Assuming a person who is older and also has a history of certain illnesses applies for insurance coverage, the insurance company might grant such a person coverage, even if he or she might not have qualified for that particular coverage under normal circumstances. The risk here is from the danger that the person might develop some sort of illness that will end up costing the insurance company money.

Man climbing a rope
Man climbing a rope

In this case, the belief in support for cash flow underwriting is that the revenue generated from the premiums charged to such high-risk people will be reassigned to places where they will yield much more money, or be reinvested in a manner that will still earn more money and allow the insurance company to show strong profits even if it has to spend money on such high-risk cases. An analogy that describes cash flow underwriting is a situation where a retailer sells a product below its actual or determined value in order to reinvest the money generated from such a sale in other ventures that will yield a lot more than the loss that was incurred as a result of the sale. Cash flow underwriting is also something that is done for a stated period as a means of generating funds, after which the insurance company will revert to its usual standards for assigning clients who qualify to matching coverage plans.

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