INSURANCE

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 (equity capital, insurance, mortgage or credit). The name derives from the Lloyd's of London insurance market. 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.

Underwriting is most nearly like pawn-shop sales. The underwriting firm has the immediate cash available to exchange for the receiving of debt and equity instruments of varying values. Like the pawn dealer the underwriter has the fiscal ability himself, to hold on his own books, the purchased instruments of debt and equity until such time as they may be favorably (to his balance sheet) sold to their ultimate purchasers. Like the pawn dealer, the underwriter has a detailed knowledge of the individuals who are capable or interested in the present or future purchase of the instruments he has purchased.

Furthermore, like the pawn dealer, the underwriter earns a profit by discounting the purchase price he will agree to pay for the purchased debt or equity. The underwriter does this because he is assuming the risk of buying the instruments immediately upon their issuance, regardless of the market’s price for them, or the desire of individual purchasers to subsequently buy them from him (the underwriter). He also assumes the risk of having to hold them on his own account until such time in the future that they may be favorably sold.

If the instrument is desirable, the underwriter and the issuer may enter into an exclusivity agreement. In exchange for a higher price paid for the instrument when issued, the issuer may agree with the underwriter to make the underwriter the exclusive agent for the placement (initial sale) of the debt or equity instrument. That is, even though the issuer may know where and to whom the instruments may be individually sold, he agrees that the underwriter will be his sole agent; and any bonds (i.e., US Treasury bonds) or stock shares must be bought through the agent. This works to the favor of the issuer over time, since when market conditions are not so favorable the underwriters agree to take the instruments and to bear the risks, and they pay the highest price in buying them.

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, they will have to hold some securities themselves. Underwriters make their income from the price difference (the "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 they are often resold to other banks and to private investors.

LEAGUE TABLES

Underwriting activity reported in Thomson Financial League Tables (numbers in $ billion) (number of issues in parenthesis):

GLOBAL DEBT, EQUITY & EQUITY-RELATED

In investment banking, underwriting is defined as the transaction between the issuer of the instruments of debt or equity and the firm which has agreed to liquidate the instruments immediately upon their issuance. In investment banking underwriting, the government or private entity which issues the debt or equity instruments has an immediate need for cash (specie), and has no interest in waiting to locate buyers for the instruments at an indeterminate or specified future date. The issuer also usually has no detailed knowledge of the individuals who are capable or interested in the present or future purchase of the instruments, and (most importantly) what the highest and most fair price for the securities may be.

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.

Underwriting may also refer to insurance; insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to 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. For example, in underwriting automobile coverage, an individual's driving record is critical. As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.

The underwriters may either decline the risk or may 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.

UNDERWRITING IN THE EU

Following Council Directive 2004/113/EC on gender equality in access to services, insurance underwriting in the EU has been slightly modified, specifically in respect to motor/auto insurance. This directive does not allow policies to be underwritten on the basis of gender without current and thorough research qualifying the difference in prices available to men or women.

REAL ESTATE UNDERWRITING

In evaluation of a real estate loan, in addition to assessing the borrower, the property itself is scrutinized. Underwriters use the debt service coverage ratio to figure out whether the property is capable of redeeming its own value or not.

FORENSIC UNDERWRITING

Forensic underwriting is the "after-the-fact" process used by lenders to determine what went wrong with a mortgage. Forensic underwriting refers to a borrower's ability to work out a modification scenario with their current lien holder, not to qualify them for a new loan or a refinance. This is typically done by an underwriter staffed with a team of people who are experienced in every aspect of the real estate field.

SPONSORSHIP UNDERWRITING

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.