Underwrite a share issue definition dictionary
For example, in underwriting automobile coverage, an individual's driving record is critical. The word underwrite has two meanings. Two major categories of exclusion in insurance underwriting are moral hazard and correlated losses.
Securities underwriting Securities underwriting, which seeks to assess risk and the appropriate price of a particular security—most often as it relates to an IPO—is performed on behalf of a potential investor, often an investment bank. The risk most typically involves loans, insurance, or investments.
Although the mechanics have changed over time, underwriting continues today as a key function in the financial world. The underwriter assesses income, liabilities debtsavings, credit history, credit score, and more depending on an individual's financial circumstances. An underwriter operates by purchasing all of the new issue of stocks or bonds from the corporation at one price and selling the issue in smaller lots to public investors at a price high enough to cover the expenses associated with the sale and to provide a profit.
Insurance underwriting With insurance underwriting, the focus is on the potential policyholder—the person seeking health or life insurance. Unlike health insurance, life-insurance underwriting is not restricted for pre-existing conditions or any other health factors. This is a way of distributing a newly issued security, such as stocks or bonds, to investors. The firm that originates the issue acts as manager of the syndicate. To issue an insurance policy on the life of a person or on property of another is to underwrite that person or property; hence insurance companies are also referred to as underwriters. The most common type of loan underwriting that involves a human underwriter is for mortgage s and is the type of loan underwriting that most people face during their lifetime. Underwriters also help to expose unacceptably risky applicants—such as unemployed people asking for expensive mortgages, those in poor health who request life insurance, or companies that attempt an IPO before they are ready—by rejecting the coverage in some cases. Natural language understanding allows the consideration of more sources of information to assess risk than used previously. However, the type of automobile is actually far more critical. That is, even though third-party buyers might approach the issuer directly to buy, the issuer agrees to sell exclusively through the underwriter. In summary, the securities issuer gets cash up front, access to the contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price. Underwriting securities, most often done via initial public offerings IPOs , helps to determine the value of the underlying company compared to the risk of funding the IPO. In the case of insurance, underwriters seek to assess a policyholder's health and other factors and to spread the potential risk among as many people as possible.
They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them.
When more than one underwriter or group of underwriters is involved, this is known as an underwriter syndicate.
Investors benefit from the vetting process that underwriting provides and helps them to make informed investment decisions. Underwriting helps to set fair borrowing rates for loans, establishes appropriate premiums, and creates a market for securities by accurately pricing investment risk.
Types of underwriting
With insurance, the risk involves the likelihood that too many policyholders will file claims at once. For example, in underwriting automobile coverage, an individual's driving record is critical. Underwriters also help to expose unacceptably risky applicants—such as unemployed people asking for expensive mortgages, those in poor health who request life insurance, or companies that attempt an IPO before they are ready—by rejecting the coverage in some cases. Securities underwriting[ edit ] Securities underwriting is the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities both equity and debt capital. By dividing the underwriting of the securities issue, the risk is spread among the various members of the syndicate. The underwriter gets a profit from the markup, plus possibly an exclusive sales agreement. Typically, an underwriter does not under-write and distribute a security issue alone but instead organizes a syndicate for the venture. In summary, the securities issuer gets cash up front, access to the contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price.
Investors benefit from the vetting process that underwriting provides and the ability it gives them to make an informed investment decision.
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