DEFINITION of 'Underwriting Risk'

The risk of loss borne by an underwriter. Underwriting risk generally refers to the risk of loss on underwriting activity in the insurance or securities industries.


In insurance, underwriting risk may either arise from an inaccurate assessment of the risks entailed in writing an insurance policy, or from factors wholly out of the underwriter's control. As a result, the policy may cost the insurer much more than it has earned in premiums.


In the securities industry, underwriting risk usually arises if an underwriter such as a investment bank overestimates demand for an underwritten issue or if market conditions change suddenly. In such cases, the underwriter may be forced to hold part of the issue in its inventory or sell it at a loss.

BREAKING DOWN 'Underwriting Risk'

Underwriting risk is an integral part of business for insurers and investment banks. While it is impossible to eliminate it entirely, underwriting risk is a key focus for risk mitigation efforts. The long-term profitability of an underwriter is directly proportional to its mitigation of underwriting risk.

RELATED TERMS
  1. Underwriting Income

    Profit generated by an insurer's underwriting activity over a ...
  2. Underwriter

    An underwriter is a company or other entity that administers ...
  3. Underwriting Spread

    The spread between the amount underwriters pay an issuing company ...
  4. Underwriting Cycle

    Fluctuations in the underwriting business over a period of time. ...
  5. Underwriting Agreement

    A contract between a group of investment bankers who form an ...
  6. Insurance Underwriter

    A financial professional that evaluates the risks of insuring ...
Related Articles
  1. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  2. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  3. Insurance

    What Does an Underwriter Do?

    In the investment world, an underwriter is a company that helps corporations or other issuing bodies distribute their securities.
  4. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  5. Financial Advisor

    All About Impaired Risk Annuites and Insurance

    What are impaired risk insurance products and understanding life insurance rate classes, table ratings and flat extra premiums.
  6. Insurance

    IPO Flippers And The Companies Who Hate Them (TWTR, ETSY)

    Learn how flipping activity affects an initial public offering.
  7. Insurance

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  8. Insurance

    How to Get Life Insurance With a History of Alcohol

    You can still get life insurance with a history of alcohol abuse by using these tips.
RELATED FAQS
  1. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
  2. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  3. What is the underwriter's job in a real estate transaction?

    Find out why the underwriter may be the most important person in your real estate transaction, and learn what information ... Read Answer >>
  4. When is it beneficial for underwriters to sell stock below the minimum rate?

    Learn when selling stock below the minimum rate can be beneficial. Find out how the 1987 market crash affected an offering ... Read Answer >>
  5. How does an underwriter syndicate work together on an initial public offering (IPO)?

    Learn how underwriting syndicates work together when helping a company undertake an initial public offering, and learn about ... Read Answer >>
  6. What are some roles of an investment bank?

    Explore the world of investment banking and discover the various functions that investment bankers serve, such as handling ... Read Answer >>
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center