Underwriter – Definition

Cite this article as:"Underwriter – Definition," in The Business Professor, updated May 6, 2019, last accessed December 4, 2020, https://thebusinessprofessor.com/lesson/underwriter-definition/.


Underwriter Definition

An underwriter is a professional that is paid to evaluate or assume a client’s risk. This underwriter evaluates and assumes risks such as premium, spread, commission or interest that are involved in insurance, asset pricing and other types of market. Aside from professionals, financial institutions such as insurance companies, banks and investment industries provide underwriting services for other parties. Basically, what an underwriter does is to accept all the financial risk arising from a debt security, equity market or even insurance. Underwriters cover losses for businesses that their clients engage in.

A Little More on What is an Underwriter

Underwriters perform many roles that include assuming liabilities and risk for any a stipulated fee. An underwriter agrees to provide money or guarantee in situations when losses or liabilities are acquired by their clients. Underwriters are professionals in the finance industry, equity markets, mortgage industry, insurance and investment industries, among others.

They are risk experts that investors rely on before taking financial decisions. Underwriters help investors outline the risks in any business and also assure them whether the risk is worth taking or otherwise. If the market will not buy certain shares, the underwriters are obliged to buy them, they also engage in initial public offerings and reselling of debt securities.

Mortgage Underwriters

Mortgage loan underwriters are popular in the United States because quite a number of lenders use mortgage underwriting to assess the risk of a mortgage loan. Mortgage loan underwriters evaluate the risks of potential clients and have final approval for all mortgage loans. All procedures must be duly followed before approval or disapproval is decided upon. There are certain criteria that lenders must meet as well as the terms and conditions of mortgage loans they need to consent to. Mortgage underwriters provide guidance for lenders and also ensure they need the necessary requirements before approving or disapproving a mortgage loan.

Insurance Underwriters

Insurance underwriters perform similar functions as the mortgage underwriters but in a completely different industry. The insurance industry is a sensitive where professionals need to assess all clients, identify their risks and exposures which will form insurance decisions that are to be made. These professionals also conduct insurance coverage analysis and give advice on risk management.

Insurance underwriters evaluate or review all insurance applications and identify the risk of potential clients. Based on their findings, these underwriters decide whether to accept or reject clients and how much coverage clients should receive when they are accepted.

Equity Underwriters

An equity market or stock market is where the shares or stock values of a company are issued and traded. Equity underwriters play important roles in the equity market, they are responsible for the issuance and distribution of stock or equity in the market. An equity underwriter is always involved in an initial public offering (IPO). Processes relating to equity issuance, purchase, sales or exchange are handled by equity specialists or underwriters. Also, these underwriters parley with the issuing company to decide on the price of stocks, equities or securities.

IPO underwriters

One cannot undermine the roles of underwriters in initial public offering (IPO) processes. IPO is a process of selling corporate shares in a stock exchange market for the first time. So, more than one or two underwriters (investment banks) are usually involved in IPOS. IPO underwriters have the responsibility of ensuring that participants in the market satisfy all necessary requirements.

IPO underwriters enter into a contract with a stock issuing company to sell its shares to the public. The underwriters liaise with issuers in deciding the price and number of shares to be sold. They also scout for potential investors who interested in the offer.

Debt Security Underwriters

This category of underwriters are interested in purchasing stock, bonds and securities for the purpose of reselling them to make profit. Debt security underwriters buy government bonds, municipal bonds, corporate bonds and other debt securities form the issuers. The goal of their purchase is strictly to make profit by reselling the debt securities to interest investors in the stock exchange market or resell to stock dealers.

References for Underwriter

Academic Research on Underwriter

Initial public offerings and underwriter reputation, Carter, R., & Manaster, S. (1990). the Journal of Finance, 45(4), 1045-1067.

Conflict of interest and the credibility of underwriter analyst recommendations, Michaely, R., & Womack, K. L. (1999). The Review of Financial Studies, 12(4), 653-686.

Underwriter reputation, initial returns, and the long‐run performance of IPO stocks, Carter, R. B., Dark, F. H., & Singh, A. K. (1998). The Journal of Finance, 53(1), 285-311.

Underwriter price support and the IPO underpricing puzzle, Ruud, J. S. (1993). Journal of Financial Economics, 34(2), 135-151.

Ambiguity and underwriter decision processes, Kunreuther, H., Meszaros, J., Hogarth, R. M., & Spranca, M. (1995). Journal of Economic Behavior & Organization, 26(3), 337-352.

Underwriter compensation and corporate monitoring, Hansen, R. S., & Torregrosa, P. (1992). The Journal of Finance, 47(4), 1537-1555.

When the underwriter is the market maker: An examination of trading in the IPO aftermarket, Ellis, K., Michaely, R., & O’hara, M. (2000). The Journal of Finance, 55(3), 1039-1074.

Underwriter warrants, underwriter compensation, and the costs of going public, Barry, C. B., Muscarella, C. J., & Vetsuypens, M. R. (1991). Journal of Financial Economics, 29(1), 113-135.

Relationship‐specific assets and the pricing of underwriter services, James, C. (1992). The Journal of Finance, 47(5), 1865-1885.

Local underwriter oligopolies and IPO underpricing, Liu, X., & Ritter, J. R. (2011). Journal of Financial Economics, 102(3), 579-601.

The role of IPO underwriting syndicates: Pricing, information production, and underwriter competition, Corwin, S. A., & Schultz, P. (2005). The Journal of Finance, 60(1), 443-486.

Do bank relationships affect the firm’s underwriter choice in the corporate‐bond underwriting market?, Yasuda, A. (2005). The Journal of Finance, 60(3), 1259-1292.

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