Underwriting Risk

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 Fees

    Underwriting fees are monies collected by underwriters for performing ...
  2. Underwriting Income

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

    Costs and expenditures associated with underwriting activity. ...
  6. Underwriter

    An underwriter is a company or other entity that administers ...
Related Articles
  1. Professionals

    New Issue Market

    FINRA Series 6 Exam Study Guide - New Issue Market. In this section: IPOs, underwriter and several kinds of underwriting agreements.
  2. Professionals

    C. Underwriting Corporate Securities

    Once a business has decided that it needs to raise capital to meet its organizational objectives, they must determine how to raise the needed capital. Most corporations at this point will hire ...
  3. Investing Basics

    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 ...
  4. Professionals

    Types Of Underwriting Commitments

    Firm Commitment In a firm commitment underwriting, the underwriter guarantees to purchase all of the securities being offered for sale by the issuer regardless of whether or not they can sell ...
  5. Professionals

    THE UNDERWRITING SYNDICATE

    Awarding the Issue There are two ways in which the corporation may select an underwriter. A corporation may elect to have multiple underwriters submit bids and choose the underwriter with the ...
  6. Professionals

    UNDERWRITING CORPORATE SECURITIES

    Underwriting Corporate Securities Once a business has decided that it needs to raise capital to meet its organizational objectives, they must determine how to raise the needed capital. Most corporations ...
  7. Professionals

    Underwriting Corporate Securities

    Once a business has decided that it needs to raise capital to meet its organizational objectives, they must determine how to raise the needed capital. Most corporations at this point will hire ...
  8. Retirement

    IPO Basics: Getting In On An IPO

    The Underwriting Process Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting. When a company ...
  9. Professionals

    Underwriting Corporate Securities

    Once a business has decided that it needs to raise capital to meet its organizational objectives, they must determine how to raise the needed capital. Most corporations at this point will hire ...
  10. Professionals

    Awarding The Issue

    There are two ways in which the corporation may select an underwriter. A corporation may elect to have multiple underwriters submit bids and choose the underwriter with the best bid. This is ...
RELATED FAQS
  1. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ... Read Answer >>
  2. 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 >>
  3. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter as well as the important ... Read Answer >>
  4. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  5. What is the difference between underwriting and investment income for an insurance ...

    Learn more about insurance companies' investment and underwriting incomes. Read about how investment incomes and underwriting ... Read Answer >>
  6. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center