What happens when a
Q is put to an ordinary man and an expert ?
While
an Ordinary man would try and answer looking into various realms, Specialist’s
answer would get constrained to the field of specialization. He may be authentic, yet would be constricted
to a specific set of ideas. Now the Q is
what is Underwriting ?
photo above : Bharat Insurance Building, Mountroad, Chennai
Those in Insurance
industry transact Insurance business and call themselves variously Insurers, Assurers, Underwriters,
Risk Managers and so on. Insurance
primarily is a form of risk management providing protection against uncertain
losses. In a way it is the equitable
transfer of a risk of a loss from one entity to another, in exchange of
consideration called premium. Insurance Company is the one selling insurance;
the rate determined for undertaking the risk is known as premium. Insurance is a contract whereby one person, the Insurer –
promises and undertakes in exchange of consideration to indemnify the policy
holder in the event of a loss or damage occurring due to certain specified
perils. There are sound theories of ‘law
of large numbers’ and the like.
The
man at the helm, evaluates, analyses and determines whether the proposed risk
should be accepted, if so on what terms and conditions and at what rates- that
is Underwriting. The term comes
from the tradition of Lloyds of London, a historical Insurer who has been in
business for centuries. The function of
the underwriter is not only to collect premium enriching the coffers of
Insurers but also to ensure protection to the company's book of business from
risks that they feel will make a loss and issue insurance policies at a premium
that is commensurate with the exposure presented by a risk But Underwriting is not restricted to ‘Insurance alone’. Broadly, Underwriting refers to the process
that a large financial service provider (bank, insurer, investment house) uses
to assess the eligibility of a customer to receive their products (equity
capital, insurance, mortgage, or credit).
Securities
underwriting : refers to the process by which investment
banks raise investment capital from investors on behalf of corporations and
governments that are issuing securities (both equity and debt capital).
Underwriting
agreement
: Securities-purchase contract between an underwriter or underwriting syndicate
and an issuer of bonds or shares. Among other terms, it specifies the price at
which the security will be offered to the public (public offering price),
underwriter's profit margin (underwriting spread), and the date by which the
payments must be settled (settlement date).
Definition of
'Underwriting Agreement' : A contract between a group of investment bankers who
form an underwriting group or syndicate, and the issuing corporation of a new
securities issue. The underwriting agreement contains the details of the
transaction, including the underwriting group's commitment to purchase the new
securities issue, the price that the underwriting group will pay to the issuing
corporation and the initial resale price.
Investopedia
explains 'Underwriting Agreement' as : Underwriting
agreement can be considered the contract between a corporation issuing a new
securities issue and the underwriting group that has agreed to purchase and
then resell the issue for a profit. The purpose of the underwriting agreement
is to ensure that all of the players understand their responsibility in the
process, thus minimizing potential conflict.
The main purpose of
an underwriting agreement is to clarify all the terms and conditions associated
with the underwriting process related to these new securities. To that end,
both the corporation and the underwriter will make specific commitments
regarding the stock issue.
Some
more Underwriting :
Real
estate underwriting : In evaluation of a real estate loan, in addition to
assessing the borrower, the property itself is scrutinized. Underwriters use
the debt service coverage ratio to figure out whether the property is capable
of redeeming its own value or not....
Forensic
underwriting
: is the "after-the-fact" process used by lenders to determine what
went wrong with a mortgage. Forensic underwriting refers to a borrower's
ability to work out a modification scenario with their current lien holder, not
to qualify them for a new loan or a refinance. This is typically done by an
underwriter staffed with a team of people who are experienced in every aspect
of the real estate field.
Have heard this
with reference to study of large losses by Insurers also.
Sponsorship
underwriting:
will refer to financial sponsorship of a
venture, and is also used as a term within public broadcasting (both public
television and radio) to describe funding given by a company or organization
for the operations of the service, in exchange for a mention of their product
or service within the station's programming.
With regards – S.
Sampathkumar
10th Feb
2015.
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