What is an underwriter-underwriting

Underwriting is a term that varies depending on what it is used for. Broadly, it refers to a form of risk management that is useful to financial entities. Underwriters are people who perform this service, but the term can be used to describe the professional who uses actuarial methods to determine your viability for a loan or insurance, to the bank that buys up a new issuance of debt or equity for resale.

The Basics of Underwriting
- Underwriting is a process whereby a large financial institution assesses whether or not a prospective client is eligible to receive a given service. For example, banks, insurance companies and investment funds seek underwriting for the issuance of credit or insurance policies. This means that the specifics of what underwriting involves can change depending on who is doing it, but the basic concept is one of risk mitigation/management. The two most commonly encountered forms of underwriting involve conventional banking loans and insurance.
Bank Underwriting
- Conventional banking uses the term “underwriting” to describe the analysis of a borrower’s ability to pay. For a private citizen, this will typically involve a credit report, financial statements, and details regarding employment and salary. This is an example of underwriting that should be familiar to most people. In the case of a real estate transaction, underwriting may involve the property itself being brought into scrutiny.
Insurance Underwriting
- In the insurance industry, underwriting means plain risk assessment. An underwriter evaluates whether a person or project should receive insurance, how much coverage they should get, and how much they should pay for it. Every insurance company has its own set of specific guidelines regarding how underwriting should work, but the purpose is always the same–to make sure that the company brings in more money than it is likely to pay out on the policy. For example, a driver with a terrible record is likely to be refused for auto insurance and if he does receive it, the coverage will be limited and expensive. This is the other area of underwriting that most private citizens will be familiar with.
Securities Underwriting
- Securities underwriting is involved in the issuance of new bonds or stock. A group of financial institutions agrees to underwrite the stock or bond issuance by buying up all the new issue themselves, and then reselling them. This is typically the case when the issuer of the securities needs the capital in a hurry and does not have the time or resources to locate sufficient buyers themselves. For example, a city needing to plug a budget shortfall quickly might sell bonds at a discount to a group of underwriters, who then assume the risk for selling those bonds onto themselves. The banks/underwriters do this in hopes of turning a profit in the resale of those bonds.
Considerations
- Much of what goes into underwriting comes from a field called “actuarial science.” This field uses mathematical and statistical methods to assess risk and is a specialty of the financial industry. A person who uses actuarial science is called an actuary, with some versions of underwriters having substantial overlap with the role of an actuary.