Underwriter

Key Highlights

• An underwriter assesses the risk involved in insuring people, assets, or financial transactions and decides the terms and pricing of coverage or loans accordingly.

• Types of Underwriters includes insurance, mortgage, equity and debt security underwriters.

What is Underwriter?

An underwriter assesses the risk involved in insuring people, assets, or financial transactions and decides the terms and pricing of coverage or loans accordingly. They analyze various factors such as creditworthiness, health, income, property value, or market conditions to determine the likelihood of a claim or default. Based on this evaluation, underwriters either approve or decline applications and set appropriate premiums or interest rates to compensate for the risk assumed.

Types of Underwriters

• Insurance Underwriters: Evaluate risks related to insuring individuals or property, deciding on coverage acceptance and premium pricing based on factors like age, health, occupation, and lifestyle.

• Mortgage Underwriters: Assess loan applications for homebuyers by reviewing credit history, income, debt ratios, and property appraisal to approve or deny mortgage loans.

• Equity Underwriters: Often investment banks that manage the issuance and distribution of securities during events like Initial Public Offerings (IPOs), setting share prices and guaranteeing capital to issuing companies.

• Debt Security Underwriters: Evaluate and assume risks related to debt instruments, ensuring proper pricing and risk management for lenders and investors.

Functions and Responsibilities

• Assess and quantify the risk of insuring or lending to a party.

• Decide on acceptance or rejection of applications for insurance policies, loans, or securities.

• Set premiums, interest rates, or underwriting fees based on risk levels.

• Use actuarial data, credit reports, and specialized software to inform decisions.

• Monitor and reassess risks over time, especially at policy renewals or loan reviews.

Types of Underwriting Methods

• Firm Underwriting: Underwriter commits to buying a specific number of shares beyond a promised subscription.

• Partial Underwriting: In partial underwriting, underwriters agree to cover only a certain portion of the total issue. The rest is left open to the market, meaning the company takes on the risk for any unsubscribed shares.

• Syndicate and Joint Underwriting: Multiple underwriters share the risk for large issues.

• Sub-Underwriting: An underwriter delegates part of the risk to another underwriter when the issue exceeds capacity.