Underwriting
Underwriting
Underwriting (/ˈʌndərˌraɪtɪŋ/) is a term used in the insurance and finance industries. It refers to the process by which insurers or investors evaluate the risks associated with a particular investment or insurance policy and decide whether to take it on and at what price.
Etymology
The term "underwriting" comes from the practice of having risk takers write their names under the total amount of risk they are willing to accept at a specified premium. This practice, which dates back to the Lloyd's of London insurance market in the 17th century, is the origin of the term.
Related Terms
- Risk assessment: The process of evaluating the risks associated with a particular action or situation.
- Premium (insurance): The amount paid for an insurance policy.
- Insurable interest: A legal or equitable interest in property or a potential liability, sufficient to justify purchasing insurance to protect against the risk of loss.
- Actuarial science: The discipline that applies mathematical and statistical methods to assess risk in insurance, finance and other industries.
Process
In underwriting, the risk of insuring a particular person or situation is evaluated by an underwriter. The underwriter considers various factors, such as the potential for loss, the likelihood of a claim being made, and the amount of coverage requested. Based on this evaluation, the underwriter decides whether to offer insurance and, if so, at what price.
Types of Underwriting
There are several types of underwriting, including insurance underwriting, securities underwriting, and real estate underwriting. Each type involves a different set of risks and requires a different set of skills and knowledge.
- Insurance underwriting: Involves evaluating the risks associated with insuring a particular individual or asset and determining the appropriate premium for the insurance policy.
- Securities underwriting: Involves the process of issuing new securities, such as stocks or bonds, to the public. The underwriter assesses the risk and market demand for the securities and determines the price at which they should be sold.
- Real estate underwriting: Involves evaluating the risks associated with a real estate investment, including the property's value, the borrower's creditworthiness, and market conditions.
External links
- Medical encyclopedia article on Underwriting
- Wikipedia's article - Underwriting
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