underwriting
The process by which an individual or institution takes on financial risk for a fee, typically in insurance or securities issuance.
Example
“The investment bank was hired to underwrite the company's IPO.”
Memory Tip
UNDER-writing — you literally write your name UNDER the risk. You're accepting liability for it.
Why It Matters
Understanding underwriting helps you grasp how insurance companies and investment banks manage risk, which directly affects the premiums you pay for insurance and the terms you receive when borrowing money. When you apply for a mortgage or insurance policy, the underwriting process determines whether you qualify and how much you will pay, making it crucial to your personal financial planning.
Common Misconception
Many people think underwriting only applies to insurance, but it is equally important in securities issuance and lending. Underwriters in all these fields perform similar risk assessments, though the specific details and criteria vary depending on whether they are evaluating health risks, financial stability, or investment viability.
In Practice
When you apply for a homeowner's insurance policy, the insurance underwriter reviews your home's age, location, condition, and your claims history to determine your risk level. If your home is 50 years old with a history of water damage, the underwriter might charge you a 25 percent higher premium than a comparable new home with no claims, or potentially deny coverage altogether based on the assessed risk.
Etymology
From the practice of writing one's name under a risk — literally signing under the risk you accept.
Common Misspellings
Compare the best financial products for you
Related Terms
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.