Underwriting is the process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing either equity or debt securities.

The word "underwriter" originally came from the practice of having each risk-taker write his name under the total amount of risk he was willing to accept at a specified premium. This centuries-old practice continues, in a way, as new issues are usually brought to market by an underwriting syndicate , in which each firm takes the responsibility, as well as the risk, of selling its specific allotment.

Posts - The Oregonian Editorial Board | omotohu.web.fc2.com

Underwriters also research and assess the risk each applicant presents. This helps to create the market for securities by accurately pricing risk and setting fair premium rates that adequately cover the true cost of insuring policyholders.

If a specific applicant's risk is deemed to be too high, underwriters may refuse to cover it. Insurance is the most common example of underwriting that most people encounter. In order for insurance to work well, risk has to be spread out among as many people as possible.

Not Found

Underwriting helps insurance companies manage the risk that too many policyholders will file claims at once by spreading out the risk among outside investors. Once an underwriter has been found for a given policy, the capital the underwriter puts up at the time of investment acts as a guarantee that the claim can be paid, which allows the company to issue more insurance to other customers.

In exchange for taking on this risk, the underwriter is entitled to payments drawn from the policyholder's premiums.

Making a market for securities is the chief function of an underwriter. Every insurance policy or debt instrument , such as a mortgage , carries a certain risk that the end customer will either default or file a claim.

This potentially represents a loss to the insurer or the lender. A big part of the underwriter's job is to weigh the known risk factors and investigate the truthfulness of an applicant's application for coverage in order to determine the minimum price for providing coverage.

In this way, underwriters help find the true market price of risk by deciding on a case-by-case basis which policies they are willing to cover and what rates they need to charge to make a profit.

They also help exclude unacceptably risky applicants, such as people in very poor health who want life insurance or unemployed people asking for expensive mortgages, by rejecting coverage in some cases.

Worth - Radiolab

This substantially lowers the overall risk of expensive claims or defaults and allows the agent to offer more competitive rates to the less risky members of the risk pool. Dictionary Term Of The Day.

MSRB Rule G - Conduct of Municipal Securities and Municipal Advisory Activities - Interpretive Guidance

A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

Underwriting Risk Underwriting Fees Underwriting Spread Underwriting Agreement Insurance Underwriter Adjusted Underwriting Profit Underwriting Expenses Underwriting Cycle Offering Price. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

Work With Investopedia About Us Advertise With Us Write For Us Contact Us Careers. Get Free Newsletters Newsletters. All Rights Reserved Terms Of Use Privacy Policy.