What is an Underwriter?

Mary McMahon
Mary McMahon

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.

In business finance, underwriters offer a company's stock for sale during its initial public offering (IPO).
In business finance, underwriters offer a company's stock for sale during its initial public offering (IPO).

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, the underwriter is the party that has agreed to pay for damages that are covered by a policy.
In the insurance industry, the underwriter is the party that has agreed to pay for damages that are covered by a policy.

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.

During the Age of Sail, agents for Lloyds of London signed under a list of risks when insuring a merchant ship's voyage.
During the Age of Sail, agents for Lloyds of London signed under a list of risks when insuring a merchant ship's voyage.

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.

A medical underwriter determines if an applicant should be granted medical coverage based on pre-existing medical conditions.
A medical underwriter determines if an applicant should be granted medical coverage based on pre-existing medical conditions.

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.

Health underwriters may require an applicant to undergo a medical evaluation.
Health underwriters may require an applicant to undergo a medical evaluation.
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Discussion Comments

Sunny27

Oasis11- An insurance underwriter jobs entails assessing risk on various insurance policies.

The insurance underwriter underwriting an auto insurance policy looks at the prospects driving record, geographical location, and type of vehicle they are insuring for example.

These three factors determine if the prospects will be offered a policy.

oasis11

A mortgage underwriter assesses the risk of each individual mortgage application. The mortgage underwriter looks at credit history of the applicant, the appraisal of the property in question, and possible down payment considerations.

Since the mortgage underwriter is assessing the risk for the loan, they can also form certain guidelines. They may only offer mortgage loans for example, to those with the credit rating of 700 or more.

They may also have specific guidelines regarding specialty properties like condominiums. Many underwriting guidelines require condominiums to have a 50% or more owner occupancy rate.

In addition, foreclosures should not be more than 10% of the building. These guidelines lessen the risk of defaults for the loan, which is what a loan underwriter's primary function is.

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