What is underwriting?

Underwriting is the process of evaluating risk, and associated with financial service companies, such as banks, insurers and investment banks. In general terms, it means receiving payment in return for being willing to cover a risk that may arise from certain events.

Where have you heard about underwriting?

It’s normally a word you see when taking out insurance products. Underwriting enables insurance companies to manage the risk that too many of their customers will claim on their policies all at once by spreading that risk to outside investors.

What you need to know about underwriting.

Underwriting gets its name from Lloyd’s of London. Bankers, who were paid an insurance premium for accepting that a sea voyage could potentially end in shipwreck, would literally write their names under the risk information written on the Lloyd’s document.

Underwriting is also the process of handling a new share issue. When a company decides it wants to issue stock, bonds or other publicly traded securities, it hires investment bankers to underwrite the issue. The underwriters buy the shares from the issuing company and take the risk of having to sell them to investors to profit from the investment.