What is an Underwriter?

An underwriter is a person or firm who assumes financial risks on behalf of another. The term is used in a number of industries; it can refer to an insurance company, an investment bank, or an individual sponsor of an event. Generally, the person or company receives special terms in exchange for its services; these terms often include a financial stake in the thing which the company agrees to underwrite.

The term comes from the tradition at Lloyds of London, an important historical insurer that used to provide insurance for ocean-going ships. Lloyds would agree to take responsibility for the inherent risks of sailing in exchange for a set premium paid by the ship's owner, and often for a stake in the profit of the voyage as well. The backers or a voyage would sign directly under the listed risks, leading to the slang term “underwriter”.

In the insurance industry, this company agrees to pay for things like damages to homes and cars, or health insurance, in exchange for regular premiums paid by the person or firm requesting coverage. The fees for insurance vary, depending on the individual risks that the person being insured represents. Insurance underwriters are trained to assess these risks and to charge accordingly. For example, one might request an additional premium for fire insurance for a structure in a region that often experiences wildfires.

In terms of financial securities, an underwriter like an investment bank helps a company to go public with its stock. It works with the company to determine a fair price, and then it buys the stock in bulk at a set price, thereby providing the company with instance capital. The bank is expected to sell the stock to third parties, thereby making a profit. Should it overestimate the value of a stock, the firm may have to eat the difference, or hold onto the stock until prices rise.

The term is also used to describe people who sponsor events or charities. Underwriters can be wealthy individuals or companies that wish to support the event. It is not uncommon for such individuals to retain significant control over an event or charity, and because of this, many organizations seeks out multiple sponsor to give themselves more freedom. In exchange for supporting the event, the company or person receives free promotion and accolades, which can increase positive public sentiments about it.