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Encyclopedia > Underwriting

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products like equity capital, insurance, mortgage or credit to a customer. The name derives from the Lloyd's of London insurance market in London, United Kingdom. Financial bankers, who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium, would literally write their names under the risk information which was written on a Lloyd's slip created for this purpose. This article is about the legal mechanism used to secure property in favor of a creditor. ... It has been suggested that Council of Lloyds be merged into this article or section. ... This article is about the capital of England and the United Kingdom. ... Five for one is a reference in William Shakespeares The Tempest to a travellers insurance practice conducted in medieval England. ... This article is actively undergoing a major edit. ...


In banking, underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrower's credit history, which is detailed in a credit report; and the lender's evaluation of the borrower's credit needs and ability to pay. Underwriting can also refer to the purchase of corporate bonds, commercial paper, Government securities, municipal general obligation bonds by a commercial bank or dealer bank for its own account, or for resale to investors. Bank underwriting of corporate securities is carried out through separate holding company affiliates, called securities affiliates, or Section 20 affiliates. For other uses, see Bank (disambiguation). ... Credit as a financial term, used in such terms as credit card, refers to the granting of a loan and the creation of debt. ... For other uses, see Loan (disambiguation). ... Historical financial statement Financial statements (or financial reports) are formal records of a business financial activities. ... A credit report summarizes historical financial information collected to determine an individuals or an entitys credit worthiness; that is, the means and willingness to repay an indebtedness. ... A corporate bond is a bond issued by a corporation. ... Commercial paper is a money market security issued by large banks and corporations. ... A commercial bank is a type of financial intermediary and a type of bank. ... In accountancy, an account is a label used for recording and reporting a quantity of almost anything. ...

Contents

Securities underwriting

Securities underwriting is the way business customers are assessed by investment houses for access to either equity or debt capital. For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable instrument representing financial value. ...


This is a way of placing a newly issued security, such as stocks or bonds, with investors. A syndicate of banks (the lead-managers), underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, then they end up holding some securities themselves. Underwriters make their income from the price difference, or underwriting spread, between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering. When a dealer bank purchases Treasury securities in a quarterly Treasury bond auction, it acts as underwriter and distributor. Treasury Securities purchased by a primary dealer are held in a dealer bank's trading account assets portfolio, and often resold to other banks, and to private investors. This article is about the association term. ... The Underwriting spread is the money difference between the amount paid by the underwriting group in a new issue of securities and the price at which securities are offered for sale to the public. ... Trading account assets refer to a separate account managed by banks that buy (underwriting) U.S. government securities and other securities for their own trading account or for resale at a profit to other banks and to the public, rather than for investment in the banks own investment portfolio. ...


League tables

Underwriting activity reported in Thomson Financial League Tables [1](numbers in $ billion) (number of issues in parenthesis): Thomson Financials standard league tables are rankings of Investment Banks in terms of the dollar volume of deals they work on. ...


Global Debt, Equity & Equity-related

Year Underwriting Activity Source
2004 5,693 (20,066) Q4 2004 report
2003 5,326 (19,706) Q4 2003 report
2002 4,257 (14,070) Q4 2002 report
2001 4,112 (NA) Q4 2001 report

Insurance underwriting

Underwriting may also refer to insurance; insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether to even accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to acquire—or to "write"—business that will make the insurance company money, and to protect the company's book of business from risks that they feel will make a loss. Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. ... This article is actively undergoing a major edit. ...


In simple terms, it is the process of issuing insurance policies. Underwriters often refer to themselves as "Police-persons of Insurance."[citation needed] An Insurance contract determines the legal framework under which the features of an insurance policy are enforced. ...


Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. For example, in underwriting automobile coverage, an individual's driving record is critical. As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.[2] Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individuals or individuals death. ... The term health insurance is generally used to describe a form of insurance that pays for medical expenses. ... Medical underwriting is an insurance term referring to the use of medical or health status information in the evaluation of an applicant for coverage (typically for life or health insurance). ...


The underwriters can either decline the risk, or may decide to provide a quotation in which the premiums have been loaded, or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business) insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance.


Real estate underwriting

In evaluation of a real estate loan, in addition to assessing the borrower, the property itself is scrutinized. Underwriters use the debt service coverage ratio to figure out whether the property is capable of redeeming its own value or not. The debt service coverage ratio, or debt service ratio, is the ratio of net operating income to debt payments on a piece of investment real estate. ...


Forensic Underwriting

Forensic underwriting is the "after the fact" process used by lenders to determine what went wrong with a mortgage.[3] Forensic Underwriting refers to a borrowers ability to work out a modification scenario with their current lien holder, not to qualify them for a new loan or a refinance. This is typically done by an underwriter staffed with a team of people who are experienced in every aspect of the real estate field.


Other

Underwriting may also refer to financial sponsorship of a venture, and is also used as a term within public broadcasting (both public television and radio) to describe funding given by a company or organization for the operations of the service, in exchange for a mention of their product or service within the station's programming. For more on underwriting in public broadcasting, please see underwriting spot. Sponsorship can refer to several concepts: A sponsors support of an event, activity, person, or organization. ... Public broadcasting is a form of public service broadcasting (PSB) intended to serve the diverse needs of the viewing or listening public. ... Public broadcasting (also known as public service broadcasting or PSB) is the dominant form of broadcasting around the world, where radio, television, and potentially other electronic media outlets receive funding from the public. ... Public broadcasting (also known as public service broadcasting or PSB) is the dominant form of broadcasting around the world, where radio, television, and potentially other electronic media outlets receive funding from the public. ... An underwriting spot is an announcement made on public broadcasting outlets, especially in the United States, in exchange for funding. ...


References

  1. ^ Link to current Thomson Financial League Tables: [1]
  2. ^ "Risk Classification (for All Practice Areas)," Actuarial Standard of Practice No. 12, Actuarial Standards Board, December 2005
  3. ^ "Lenders scrutinize borrowers," Herald Tribune, December 30, 2007, accessed March 12, 2008

Thomson Financials standard league tables are rankings of Investment Banks in terms of the dollar volume of deals they work on. ...

See also

To meet Wikipedias quality standards, this article or section may require cleanup. ... Predictive analytics encompasses a variety of techniques from statistics and data mining that process current and historical data in order to make “predictions” about future events. ... Thomson Financials standard league tables are rankings of Investment Banks in terms of the dollar volume of deals they work on. ... Medical underwriting is an insurance term referring to the use of medical or health status information in the evaluation of an applicant for coverage (typically for life or health insurance). ...

External links


  Results from FactBites:
 
Insurance underwriters (1880 words)
Underwriters are needed to identify and calculate the risk of loss from policyholders, establish appropriate premium rates, and write policies that cover this risk.
Most underwriters are based in the insurance company’s home office, but some, mainly in the property and casualty area, work out of regional branch offices of the insurance company.
Underwriters are needed particularly in the area of product development, where they assess risks and set the premiums for new lines of insurance.
Underwriter -- A complete definition (1358 words)
Underwriters usually maintain a secondary market in the securities they issue, which means they agree to purchase or sell securities out of their own inventories in order to keep the price of the securities from swinging wildly.
Underwriters often mitigate this risk by forming a syndicate whose members each share a portion of the shares in return for a portion of the fee.
Underwriters work hard to determine the “right” price for an offering, but sometimes they “leave money on the table.” For example, if XYZ Company prices its 10-million-share IPO at $15 per share but the shares trade at $30 two days after the IPO, this suggests that the underwriter probably underestimated the demand for the issue.
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