Underwriting

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Financial Terms and Glossary

Underwriting

Underwriting is the process by which an underwriter assesses and assumes the risk of issuing securities or providing insurance. In the context of securities issuance, underwriting involves determining the price and terms of new shares or bonds, assuming the risk of distributing them, and selling them to the market. In insurance, underwriting refers to evaluating risks and determining the premium and coverage terms for policyholders.

Example

During an IPO, the investment bank acting as the underwriter evaluates the company’s financial health, sets the initial share price, and agrees to buy the shares from the company to sell to the public.

Key points

• The process of assessing and assuming risk in the issuance of securities or insurance policies.

• Involves pricing new shares or bonds and distributing them to the market in securities underwriting.

• In insurance, underwriting involves evaluating risks and setting premiums and coverage.

Quick Answers to Curious Questions

What are the key steps in the underwriting process for securities?

The underwriter evaluates the company, sets the offering price, assumes the risk of the issuance, and sells the securities to investors.

How does underwriting work in the insurance industry?

Insurance underwriters evaluate the risk of insuring a policyholder and determine the premium and coverage terms based on their assessment.

Why is underwriting important in capital markets?

It ensures that new securities are appropriately priced and that the issuing company raises capital efficiently while managing the risks of distribution.