Underwriting Risk

AAA

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.

INVESTOPEDIA EXPLAINS '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 Fees

    Underwriting fees are monies collected by underwriters for performing ...
  2. Cash Flow Underwriting

    A pricing tool used by insurance companies. Cash flow underwriting ...
  3. Automated Underwriting

    A computer-generated loan underwriting decision. Using completed ...
  4. Underwriting

    1. The process by which investment bankers raise investment capital ...
  5. Negotiated Underwriting

    A process in which both the purchase price and the offering price ...
  6. Lloyd's Of London

    A British insurance market where members join hands as syndicates ...
Related Articles
  1. The History Of Insurance
    Home & Auto

    The History Of Insurance

  2. The Rise Of The Modern Investment Bank ...
    Insurance

    The Rise Of The Modern Investment Bank ...

  3. Insure Your Future With A Career As ...
    Home & Auto

    Insure Your Future With A Career As ...

  4. Brokerage Functions: Underwriting And ...
    Brokers

    Brokerage Functions: Underwriting And ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center