What Is Underwriting?
Underwriting is a very important part of investment banking, commercial banking, and insurance. It actually means undertaking a risk by receiving a payment. Generally speaking, by an underwriting an individual or organization take the risks involved in a venture or investment. The bankers willingly sign a document by which they take all the risks and responsibilities involved in that deal. Now we will discuss it more further to completely understand “what is underwriting”? So, let’s start our discussion with the “Underwriting Definition”.
So, as you can see the underwriting process is very vital in the banking sector and has a deep importance. It has a great risk involved in it, one can’t just sign a piece of document by only seeing it. It takes great knowledge and still to complete this whole underwriting process. There are a few places where the underwriting is very essential. Now we will discuss them one by one which will help you to understand the complete underwriting definition.
Underwriting in Stock Market
The underwriting in the stock market generally takes place during an initial public offering where the bankers represent the corporate and government entities. They are the one who sells the securities to the public. The bankers or the investment banks guarantee the security issuers that the securities won’t be sold less than the price they have fixed. So, what’s the risk here? If the securities are not sold on that particular price then the bankers have to hold the securities on their books, or they have to sell those in a lower price. And in this case, the bankers will have a massive loss.
Underwriting in Banking
The underwriters have a very important role in the banking industry. They are the one who evaluates the loan applications of the customers and decides whether the person qualifies for the loan or not. For example, in Mortgage Underwriting the underwriter evaluates all the potential risks before issuing a loan. And if someone is worthy of providing a loan the underwriter approves it by signing the document. So, in future, if the customer fails to repay the loan the blame would be on the Underwriter.
Underwriting in Insurance
In insurance, the underwriters decide whether a client is eligible for an insurance or not, if yes then how much premium does h/she have to pay for that insurance. The underwriters determine the risks involved with the insurance and take the premium. For example, in car insurance, the underwriter is pledged to give compensation to the car owner in the case of an accident or damage.
In above we have discussed what is underwriting? with a complete underwriting definition which is enough to get a complete idea about it. Now just read this article carefully and you will have all the information you need regarding this topic.