Underwriter

What is an Underwriter?
An underwriter is any party that evaluates and assumes another party's risk for a fee, such as a
commission, premium, spread or interest. Underwriters operate in many aspects of the financial
world, including the mortgage industry, insurance industry, equity markets, and common types
of debt securities.
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Breaking Down Underwriters

Underwriters can play a variety of specific roles, depending on the context of a financial situation.
Generally, they are considered to be the risk experts of the financial world. Investors rely on
them to determine if a business risk is worth taking. They can also contribute to sales-type
activities, as they do in the initial public offering (IPO) process and in the reselling of debt
securities.
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Mortgage Underwriters
The most common type of underwriter is a mortgage loan underwriter. Mortgage loans are
approved based on a combination of an applicant's income, credit history, debt ratios and overall
savings. Mortgage loan underwriters ensure that a loan applicant meets all of these
requirements, and they subsequently approve or deny a loan. Underwriters also review a
property's appraisal to ensure that it's accurate and that the home is roughly worth the purchase
price and loan amount.
Mortgage loan underwriters have final approval for all mortgage loans. Loans that aren't
approved can go through an appeal process, but the decision requires overwhelming evidence
to be overturned.
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Insurance Underwriters
Insurance underwriters, much like mortgage underwriters, review applications for coverage and
accept or reject an applicant based on risk analysis. Insurance brokers and other entities submit
insurance applications on behalf of clients, and insurance underwriters review the application
and decide whether or not to offer insurance coverage. Additionally, insurance underwriters
advise on risk management issues, determine available coverage for specific individuals, and
review existing clients for continued coverage analysis.
Equity Underwriters
In equity markets, underwriters administer the public issuance and distribution of securities -
in the form of common or preferred stock - from a corporation or other issuing body. Perhaps
the most prominent role of an equity underwriter is in the IPO process. An IPO is the process of
selling shares of a previously private company on a public stock exchange for the first time. IPO
underwriters are financial specialists who work closely with the issuing body to determine the
initial offering price of the securities, buy them from the issuer, and sell them to investors via the
underwriter's distribution network.
IPO underwriters are typically investment banks that have IPO specialists on staff. These
investment banks work with a company to ensure that all regulatory requirements are satisfied.
They contact a large network of investment organizations, such as mutual funds and insurance
companies, to gauge investment interest. The amount of interest received by these large
institutional investors helps an underwriter set the IPO price of the company's stock. The
underwriter also guarantees a specific number of shares will be sold at that initial price and will
purchase any surplus.
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Debt Security Underwriters

Underwriters purchase debt securities, such as government bonds, corporate bonds, municipal
bonds or preferred stock, from the issuing body (usually a company or government agency) in
order to resell them for a profit. This profit is known as the "underwriting spread." An
underwriter may resell debt securities either directly to the marketplace or to dealers, who will
sell them to other buyers. When the issuance of a debt security requires more than one
underwriter, the resulting group of underwriters is known as an underwriter syndicate.