Underwriting
Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products like equity capital, insurance or credit to a customer. The name derives from the Lloyd's of London insurance market in London, United Kingdom. Financial bankers, who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium, would literally write their names under the risk information which was written on a Lloyd's slip created for this purpose.
In banking, underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrower's credit history, which is detailed in a credit report; and the lender's evaluation of the borrower's credit needs and ability to pay. Underwriting can also refer to the purchase of corporate bonds, commercial paper, Government securities, municipal general obligation bonds by a commercial bank or dealer bank for its own account, or for resale to investors. Bank underwriting of corporate securities is carried out through separate holding company affiliates, called securities affiliates, or Section 20 affiliates.
Securities underwriting
Securities underwriting is the way business customers are assessed by investment houses for access to either equity or debt capital.
This is a way of placing a newly issued security, such as stocks or bonds, with investors. A syndicate of banks (the lead-managers), underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, then they end up holding some securities themselves. Underwriters make their income from the price difference, or underwriting spread, between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering. When a dealer bank purchases Treasury securities in a quarterly Treasury bond auction, it acts as underwriter and distributor. Treasury Securities purchased by a primary dealer are held in a dealer bank's trading account assets portfolio, and often resold to other banks, and to private investors.
League tables
Underwriting activity reported in Thomson Financial League Tables ([1]) (numbers in $ billion) (number of issues in parenthesis):
Global Debt, Equity & Equity-related
| Year | Underwriting Activity | Source |
|---|---|---|
| 2004 | 5,693 (20,066) | Q4 2004 report |
| 2003 | 5,326 (19,706) | Q4 2003 report |
| 2002 | 4,257 (14,070) | Q4 2002 report |
| 2001 | 4,112 (NA) | Q4 2002 report |
Insurance underwriting
Underwriting may also refer to insurance; insurance underwriters evaluate the risk and exposures of the prospective clients. They decide how much coverage the client should receive, how much they should pay for it, or whether to even accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to acquire—or to "write"—business that will make the insurance company money, and to protect the company's book of business from risks that they feel will make a loss.
In simple terms, it is the process of issuing insurance policies.
Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. So, for example, in underwriting automobile coverage an individual's driving record is critical. In underwriting life or health insurance medical underwriting may be used to examine the applicant's health status.
The underwriters can either decline the risk, or may decide to provide a quotation in which the premiums have been loaded, or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business) insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance.
Manual underwriting
Much like it sounds, this type of underwriting is based on the loan officer's personal review of your request as opposed to relying solely on software analysis ("automated underwriting").
Typically used for cases involving complex risk (e.g. industrial or commercial property; casualty, engineering or marine insurance; property loans), this case-by-case approach is usually required to evaluate the risk.
Other
Underwriting may also refer to financial sponsorship of a venture, and is also used as a term within public broadcasting (both public television and radio) to describe funding given by a company or organization for the operations of the service, in exchange for a mention of their product or service within the station's programming. For more on underwriting in public broadcasting, please see underwriting spot.