Underwriter
An underwriter refers to an individual or a company who is in charge of assessing, evaluating, and assuming the risk of another party for a fee. Agents and brokers can act as consumers and insurance companies, whereas underwriters play an important role in insurance companies.
Underwriters explained
Underwriters may work in many areas, such as the mortgage industry, insurance sector, stock markets, etc. The primary underwriter or lead coordinator is also referred to as a book runner. Nowadays, underwriters complete a lot of tasks and they vary from industry to industry. Underwriters are usually responsible for assessing risks connected with a transaction and they decide if a contract is worth the risk. Risk is the probability of unexpected financial losses in a situation of uncertainty of investment conditions.
Investors trust the specialists because they bring more confidence to the business decision-making. Besides, underwriters are engaged in sales activities. For instance, during the process of going public (IPO), the underwriter can buy the whole offer and resell the securities to the investing public. An IPO is the process of initial public offering of a company's shares in the stock market.
Historical background
Underwriters appeared several centuries ago during the development of navigation at sea. People who operated their own or a rented ship wanted to insure them. To do this they described their vessel, property,crew and the businessmen assumed part of the risk and obligations, specified the terms of the contract and signed their name. These businessmen were the progenitors of underwriting.
Types of Underwriters
There are three different types of underwriters, namely mortgage, insurance, equity, and debt security underwriters.
A mortgage underwriter. To get a mortgage loan, the applicant must provide the following documents: a proof of income, credit history, debt-to-income ratio, etc. A mortgage underwriter is an insurance specialist that is responsible for assessing the risk of a mortgage application. He acts on behalf of a financial institution. The underwriter operating in this sphere approves or denies loan applications and determines an applicant's maximum loan amount. The mortgage underwriter is also involved in reviewing a property's appraisal. The property's appraisal is one of the key steps in the process of obtaining a mortgage as it helps understand the purchase price of real estate and the loan amount.
Considering the results of the underwriting, the bank either approves the loan, or denies it. The credit institution may also decide to give a loan on other terms rather than requested by the client. If a lender rejects the loan application, there is normally a right of appeal.
An insurance underwriter. In insurance companies, underwriters estimate tariff rates, assess risks when issuing insurance and decide under what terms to provide it. Insurance brokers and other companies apply for insurance coverage on behalf of their clients, and underwriters determine whether to approve an applicant or not. An insurance underwriter gives detailed recommendations relating to risks, determines what type of insurance coverage is available to a client, and reviews him.
An equity underwriter. An equity underwriter is a professional market participant that helps to market, distribute and administer the public issuance of securities. Equity underwriters play a great role in an IPO process. IPO underwriters work closely with companies that want to issue equity/common stocks or preferred stocks, they assess the entire investment attractiveness of the project, as well as set the price range of the security.
The IPO underwriter is usually the investment bank, in which IPO specialists are employed. An investment bank is an intermediary that helps corporate clients ensure that all necessary requirements are met. Their tasks include collecting information from investment organizations about the demand for the company's stocks and setting a primary market price. The underwriter usually provides a guarantee to the company to sell a specific quantity of securities during the process of going public.
A debt security underwriter. Underwriters purchase newly issued debt securities from the issuer and offer them to the public to make a profit. Debt securities confirm the right of the issuer to repay the debt within a certain period and pay interest on it. Such debt securities can be bonds or promissory notes, the IOUs. The difference between the price at which the securities are offered and their purchase price is also called the "underwriting spread".
The specialist may offer debt securities to the marketplace or to dealers. When an underwriter syndicate takes part in the issuance of debt securities, it means that several investment bankers are responsible for this process.
