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{{Short description|Financial practice supporting a contract's value}}
{{Redirect|Underwriter|the United States Navy ships|USS Underwriter}}
'''Underwriting''' ('''UW''')<ref>{{Cite web|title=UW {{!}} meaning in the Cambridge English Dictionary|url=https://dictionary.cambridge.org/dictionary/english/uw|access-date=2020-10-23|website=dictionary.cambridge.org|language=en}}</ref> services are provided by some large
== History ==
The
==Securities underwriting==
In the financial [[primary market]], [[Security (finance)|securities]] underwriting is the process by which [[investment banking|investment banks]] raise investment capital from buyers on behalf of corporations and governments by issuing securities (such as [[stock]]s or [[Bond (finance)|bond]]s). As an underwriter, the investment bank guarantees a price for these securities, facilitates the issuance of the securities, and then sells them to the public (or retains them for their own proprietary account).<ref>Mishkin p.18, p.545</ref> This process is often seen in [[initial public offering]]s (IPOs), where investment banks help a corporation raise funds from the public. The underwriter is obligated to purchase the entire issue at a predetermined price before reselling the securities in the market.<ref>Mishkin p. 545</ref> Should they not be able to find buyers, they will have to hold some securities themselves. To reduce the risk, they may form a [[syndicate]] with other investment banks. Each bank will buy a portion of the security issue, and typically resell securities from that portion to the public.<ref name="Mishkin p. 547">Mishkin p. 547</ref> Underwriters make their profit from the price difference (called "[[underwriting spread]]") between the price they pay the issuer and what they collect from buyers or from [[broker-dealer]]s who buy portions of the offering.
The services provided in the process of underwriting include:
# Giving advice on whether to issue stocks or bonds, the timing of issuance (ideally, corporations should sell securities when they will obtain the highest possible price). Underwriters also have to determine at what price the security should be sold.<ref>Mishkin p. 545, 546</ref>
# Filing documents: assisting companies with making the filings required by financial authorities. Companies issuing new securities to the general public must file a [[registration statement]] detailing their financial conditions, management, competition, industry, experience, funding purposes, and securities' risk assessment. A portion of this statement is reproduced in a document called a [[Prospectus (finance)|prospectus]], which investors can access to obtain information about new securities.<ref>Mishkin p. 546</ref>
# Underwriting: A company sells the entire issue to the underwriter at an agreed price. The underwriter will then sell it to the public at a higher price to achieve a profit, to the extent that it does not retain part of the issue as a proprietary holding.<ref name="Mishkin p. 547"/>
===Risk, exclusivity, and reward===
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If the instrument is desirable, the underwriter and the securities issuer may choose to enter into an exclusivity agreement. In exchange for a higher price paid upfront to the issuer, or other favorable terms, the issuer may agree to make the underwriter the exclusive agent for the initial sale of the securities instrument. 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. The underwriter
Also, if the securities are priced significantly below market price (as is often the custom), the underwriter also curries favor with powerful
In an attempt to capture more of the value of their securities for themselves, issuing companies are increasingly turning to alternative vehicles for going public, such as direct listings and [[Special-purpose acquisition company|SPAC]]s.{{Citation needed|date=June 2023}}
==Bank underwriting==
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*Consumer loan underwriting includes the verification of such items 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. Examples include [[mortgage underwriting]].
*Commercial (or business) underwriting consists of the evaluation of financial information provided by small businesses including analysis of the business balance sheet including tangible net worth, the ratio of debt to worth (leverage) and available liquidity (current ratio).
Underwriting can also refer to the purchase of [[corporate bond]]s, [[commercial paper]], government securities, municipal general-obligation bonds by a [[commercial bank]] or dealer bank for its own [[Deposit account|account]] or for resale to investors. Bank underwriting of corporate securities is carried out through separate holding-company affiliates, called [[securities affiliate]]s or Section 20 affiliates.{{Citation needed|date=June 2023}}
Of late, the discourse on underwriting has been dominated by the advent of [[machine learning]] in this space. These profound technological innovations are altering the way traditional underwriting scorecards have been built, and are displacing human underwriters with automation. [[Natural language understanding]] allows the consideration of more sources of information to assess risk than used previously.<ref>{{cite web|url=https://www.businessnewsdaily.com/10203-artificial-intelligence-insurance-industry.html|author=Adam C. Uzialko|title=Artificial Insurance? How Machine Learning is Transforming Underwriting|date=September 11, 2017|access-date=April 28, 2019|publisher=Business News Daily}}</ref> These algorithms typically use modern data sources such as SMS / Email for banking information, location data to verify addresses, and so on. Several firms are trying to build models that can gauge a customer's willingness to pay using social media data by applying natural language understanding algorithms which essentially try to analyse and quantify a person's popularity / likability and so on, with the premise being that people scoring high on these parameters are less likely to default on a loan. However, this area is still vastly subjective.{{Citation needed|date=June 2023}}
==Insurance underwriting==
[[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,
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. However, the type of automobile is actually far more critical.{{Citation needed|date=February 2023}} As part of the underwriting process for [[life insurance|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
The underwriters may decline the risk, or may provide a quotation in which the premiums have been
Two major categories of exclusion in insurance underwriting are [[moral hazard]] and [[correlated]] losses.<ref name="npr">{{cite
For all types of insurance underwriting, advice and assistance is often provided by [[reinsurer]]s, who of course have an interest in accepting risks on appropriate terms.<ref>{{Cite web |title=Underwriting: The Role of Underwriting in the Reinsurance Industry |url=https://fastercapital.com/content/Underwriting--The-Role-of-Underwriting-in-the-Reinsurance-Industry.html |access-date=2024-03-26 |website=FasterCapital |language=en}}</ref>
==Other forms==
===Continuous underwriting===
Continuous
===Real estate underwriting===
Real estate underwriting is the evaluation of a [[real estate]] investment, either of equity ownership or of a real estate loan. The underwriting process generally involves a detailed analysis of expected cash flows, the local market, supply and demand, and risks such as the physical state of the property, environmental or geotechnical risks, zoning, taxes, and insurance. In the evaluation of a real estate loan, lenders assess both the risk of lending to a specific borrower as well as the risk of the underlying real estate. Loan underwriters use various metrics including [[debt service coverage ratio]], [[loan-to-value ratio]], and [[debt yield ratio]] to assess out whether the property is capable of making debt service payments.
===Forensic underwriting===
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==References==
{{reflist}}
=== Bibliography ===
*{{Cite book |last1=Mishkin|first1=Frederic S.|last2=Eakins|first2=Stanley|title=Financial Markets & Institutions|edition=7th|publisher=Pearson Education Inc.|location=United States|isbn=978-0-13-213683-9|date=2012|url=https://books.google.com/books?id=CgiycQAACAAJ}}
{{Authority control}}
==External links==
{{wiktionary}}
*{{wikiquote-inline}}
*[http://www.investopedia.com/terms/u/underwriting.asp Underwriting explained on Investopedia]
{{Corporate finance and investment banking}}
{{Insurance}}
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