What is an Underwriter? Definition and Examples

An Underwriter’s main job is to assess and evaluate the risks involved in a transaction or agreement. Whether it’s an insurance policy, a loan, or an investment, an underwriter ensures that the risks are manageable and that the terms are fair for both the company and you, the customer.

The insurance professional who evaluates the risk of insuring a person or thing, such as your house, car, or other possessions, is an underwriter. Their job is to ensure that your insurance policy is both profitable for the insurance company and affordable for you.

The Collins Dictionary has the following definitions of the term ‘underwriter’:

“1. An employee of an insurance company who determines the acceptability of risks, the premiums that should be charged, etc. 2. A person who underwrites, or finances something. 3. A person who underwrites (guarantees) issues of stocks, bonds, etc.”

3 Types of Underwriters

There are different types of underwriters. Some work in insurance, others in banking and finance, and others operate in the stock market. Let’s take a look at each one in more detail:

  • Insurance

In the context of insurance, an underwriter reviews your application and determines the level of risk you pose to the insurance company.

They analyze factors like your age, health, occupation, and lifestyle to decide whether to approve your policy and what premium to charge.

For instance, if you apply for life insurance, the underwriter will look at your medical history and current health condition to determine the likelihood of a claim being made.

Image showing several people assessing risk - plus a definition of an Insurance Underwriter.
Image created by Market Business News.

Based on this assessment, they set the *terms of your policy, ensuring that it aligns with the level of risk you present.

* In this context, the word ‘terms’ refers to the price (premium) of the policy, coverage amount, policy duration, exclusions, and any special conditions or requirements that might be part of your life insurance policy.

  • Banking & Finance

In banking and finance, underwriters are involved in the process of approving loans, mortgages, and even *securities.

* The term Securities, in this context, refers to financial instruments such as bonds, stocks, options, derivatives, and other contracts that are given a value and then traded.”

If you’re applying for a loan, the underwriter will review your financial information, such as credit history, income, and existing debts. Their goal is to determine whether you have the ability to repay the loan. In other words, they must decide whether you are a good risk.

They will either approve, deny, or suggest adjustments to the loan terms to match your financial situation.

This careful evaluation helps protect both the lender and you from entering into an agreement that could lead to financial difficulties.

  • Stock Market

Underwriters also play a key role in the stock market. When a company decides to go public by issuing shares, an investment bank’s underwriter assesses that company’s financial health and market potential.

They help determine the initial price of the shares and may even purchase some of the stock themselves, assuming the risk of selling it to investors.

This process ensures that the company can raise the necessary funds while offering investors a fair opportunity to buy into the business.

If the IPO (initial public offering) is not successful, the underwriter is often among the first to be blamed.

The Importance of Underwriters

The role of an underwriter is vital because it brings balance and security to financial and insurance transactions.

By carefully evaluating risks and making informed decisions, underwriters help protect the interests of both companies and customers.

Their expertise ensures that financial agreements are sound and sustainable, providing you, the customer, with the confidence that your insurance policy, loan, or investment has the backing of a solid assessment of risk.

A Brief History of Underwriters and Underwriting

The concept of underwriting dates back to the early days of marine insurance in the late 17th century. Underwriters first appeared in Lloyd’s Coffee House in London, which at the time was a hub for ship owners, merchants, and sailors.

The coffee house eventually became Lloyd’s of London, which today is the world’s leading insurance market.

At Lloyd’s Coffee House, individuals would write their names under the amount of risk they were willing to take on a particular voyage. This practice is where the term “underwriting” originates.

Want to Become an Underwriter?

If you want to become an underwriter, you should start with a bachelor’s degree in finance, business administration, economics, or a related field.

Focus on courses in statistics, mathematics, and business law.

After graduating, gain practical experience through an entry-level position, such as an underwriting assistant, where you’ll learn company-specific policies and tools. You should receive on-the-job training, often with the guidance of experienced mentors.

To advance your career, consider obtaining professional certifications like the Chartered Property Casualty Underwriter (CPCU).

As in most professions, you should stay updated on industry trends and regulations—continuous learning is essential if you want to succeed in the underwriting field.

Final thoughts

Let’s recap. Underwriters are key professionals in stock markets, insurance companies, and banking & finance.

They evaluate the risks involved in insurance policies, loans, and investments, ensuring that these agreements are both fair and sustainable for all parties involved.

As insurance professionals, they assess factors like your health, age, and lifestyle to determine policy terms that align with the level of risk you present. In banking and finance, they carefully examine your financial situation to decide whether the lender should approve a loan and under what conditions.

In the stock market, they help set the initial price of shares of companies that are going public and manage the associated risks.

Their expertise brings balance and security to financial transactions, protecting both companies and customers.