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. Underwriter

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

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

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

    1. The process by which investment bankers raise investment capital ...
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 is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  4. 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.
  5. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  6. Insurance

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

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

    Brokerage Functions: Underwriting And Agency Roles

    Learning about these various activities can give insight into how securities are issued and traded.
  8. Managing Wealth

    Top 6 Performing IPOs of 2015 (ONCE, GBT)

    2015 has produced a mixed year for initial public offerings, with small biotechs overcrowding the winner’s list.
  9. 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.
  10. Investing

    Basics Of Federal Bond Issues

    Treasuries are considered the safest investments, but they should still be analyzed when issued.
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. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center