Underwriting is a process through which an individual or institution takes on financial risk for a fee. It is a critical function in the financial world and is used to evaluate and manage financial risks in various industries such as insurance, mortgage lending, and investment banking. The term "underwriting" originated from the Lloyds of London insurance market, where financial backers would accept some of the risk on a given venture in exchange for a premium and would literally write their names under the risk information that was written on a Lloyds slip created for this purpose.
The underwriting process involves assessing the degree of risk of insurers business, evaluating the riskiness of a proposed deal or agreement, and determining the level of risk involved in a transaction or other kind of business decision. Underwriters verify the borrowers income, assets, debt, and property details in order to issue final approval on a loan application. They also evaluate newly issued shares and bonds to determine the level of risk involved. 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 summary, underwriting is a process used to evaluate and manage financial risks in various industries. It involves assessing the degree of risk of insurers business, evaluating the riskiness of a proposed deal or agreement, and determining the level of risk involved in a transaction or other kind of business decision.
