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Underwriting has different meanings based on the business we are talk about. Generally underwriting is used to define the management of risk in financial operations.
In banking it refers to the process of analyzing the borrower’s ability to repay and the underwriter’s role is to reduce defaults. In the insurance industry, risk assessment is called underwriting. The underwriters decide who can be given an insurance coverage, what should be covered, what should be paid and what is the premium that is to be charged. Underwriting is also used in the context of issuing stock or bonds. Here the stock or bonds are sold to an institution known as the underwriter at a small discount, which then sells them to the actual investors.
The term underwriting originated in insurance business in seventeenth century inEngland. Underwriters wrote their names below proposed insurance contracts for ships and cargo, in confirmation of their obligation to share part of the insurance risk. Thus the term came to be used for any person or firm that accepts the obligation to share the risk of any insurance contract or business. The underwriters, as a part of guarding their business interests, also perform some other functions associated with insurance business. For example, determining the risk associated with various kind of policies and premium rates to be charged. Such functions are now also performed in insurance companies by an internal underwriting department.
The use of term underwriting has now been extended to the function of sharing financial risks other than insurance. For example, an underwriter may agree to buy unsubscribed portion of bonds or shares of a company offered for sale to general public in a public offer. An underwriting arrangement like this is intended to instill confidence in public about the value of bonds or shares offered for sale.
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