Underwriting
IntermediateUnderwriting is the process by which a lender, insurer or investment bank assesses risk and decides whether to take it on, and on what terms.
The word is used in several areas of finance, but the core idea is the same: evaluating risk and agreeing to bear it for a price.
In lending, underwriting means assessing a borrower's ability and willingness to repay before approving a loan. The lender examines income, debts, credit history and collateral, then decides whether to lend, how much and at what interest rate.
In insurance, underwriting means assessing the risk of insuring a person or property and setting the premium. A driver with past accidents will usually pay more for car insurance than one with a clean record.
In investment banking, underwriting means helping a company or government issue new securities, such as shares or bonds. The bank often agrees to buy the securities at a set price and resell them to investors, taking the risk that they cannot all be sold at that price. For example, a bank might underwrite a share issue of 300 million, guaranteeing the company receives the money.
In each case, careful underwriting protects the underwriter from taking on risks that are not properly priced.
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