An underwriter can be defined as a party that is hired to evaluate and assess the underlying risk of another given party. Underwriters are mostly equipped with skills and knowledge that can enable them to effectively gauge the inherent risk with the other party at a certain fee.
Underwriters play an increasingly important role in the financial world because of the fact that it makes the financial arrangement more secure. This is primarily on grounds of risk assessment and enabling parties to mitigate risk if they can.
Therefore, underwriters are highly prevalent in industries that involve significant financial transactions, like the mortgage industry, the insurance industry, equity markets, as well as developing market which involves financial transactions of significant stature.
Generally speaking, it can be seen that underwriters are supposed to determine the level of risk associated with a certain project. In this regard, it might also include the likelihood of a certain outcome differing from expected outcomes or returns for different stakeholders. Therefore, they are often critical to relevant industries.
Types of Underwriters
As a matter of fact, it can be seen that there are several types of underwriters that cover various different grounds based on the risk assessment that needs to be carried out and executed. These different types of underwriters are hired for different purposes.
1) Mortgage underwriters
This is the most prominent type of underwriter. He is entrusted with the responsibility to assess the inherent risk of an existing loan. In this case, it can be seen that mortgage loans are mainly approved on the basis of a combination that is drawn on the applicant’s income, as well as credit history, and the existing debt ratios.
Therefore, in this regard, it is quite essential to note the fact that mortgage loan underwriters try to ensure that the loan applicant is able to meet the above-stated requirements, based on which they can be accepted or denied with a certain role.
In this case, underwriters also tend to review a property’s appraisal in order to ensure that the existing loan is accurate, and the underlying property is in line with the purchase price, as well as the loan amount.
2) Insurance Underwriters
Insurance underwriters have a job similar to that of mortgage underwriters. They are supposed to review existing applications for coverage and then accept or reject an applicant that is based on risk analysis.
These underwriters are supposed to review insurance applications on behalf of the clients, in order to carry out a risk assessment regarding the viability of the particular deal.
They are also supposed to advise companies on risk management issues and determine available coverage that is for specific individuals. Furthermore, they also provide their clients a continued coverage analysis.
3) Equity Underwriters
As far as the equity market is concerned, it can be seen that underwriters tend to execute the process of issuance and subsequent distribution of securities to the general public.
The most important role of equity underwriters under most circumstances is perhaps the IPO. IPO Underwriting is referred to as a very crucial role of underwriters because it helps companies to be able to sell their shares to the general public.
However, it can be seen that IPO underwriters are mainly investment banks that are specialized in areas pertaining to IPOs. They are supposed to count for a number of factors, both qualitative and quantitative-based on which they can decide on the starting share price of a particular IPO.
They are supposed to access the investment interest after a detailed interview with mutual funds and insurance companies.
4) Debt Security Underwriters
As far as debt security underwriting is concerned, it can be seen that the main job description in this regard is for them to purchase debt securities from the issuing bodies, and then resell them for a profit. The underwriting spread is created, which roughly is their profit.
Therefore, it can be seen that underwriting is referred to as a very important part and parcel of the overall game. As a matter of fact, underwriters are supposed to carry out and execute these features so that they can properly assess the risk inherent with a certain decision that needs to be taken.
Based on these recommendations, risk mitigation and hedging can then be made possible, and this is something that is considered to be a preventive measure that can help companies to reduce the overall risk element of the process.