How does insurance underwriting differ from investment underwriting?
The main difference between investment underwriting and insurance underwriting is the type of financial service being offered. An investment banker uses underwriting to assess the risk involved with representing a corporation in the sale of securities or providing investment capital for a business. Insurance companies hire underwriters to determine the risk involved with offering an insurance policy to a client.
Underwriting is used by investment bankers to set the minimum price of securities that will be sold on behalf of corporations or government entities. The bank’s risk lies in the profit or loss on the sale. If the minimum guaranteed price is not met, the bank takes the loss. If the minimum price of the securities is exceeded, the bank makes a profit.
Investment bankers also use underwriting to determine whether or not a business is creditworthy before offering investment capital. The underwriter assesses the risk by reviewing the company’s ability to repay the debt and the collateral available to support the loan. A summary report of the risk analysis is provided to the banker and the loan is either approved or denied based on the bank’s policies.
Insurance companies use underwriting to evaluate the risk of insuring a potential client. Underwriters are used by health, auto, life and home insurance companies. An insurance underwriter evaluates risk to help determine the price of a policy. A customer who is defined as high-risk will pay a higher monthly premium than a low-risk customer. In exchange for that premium, the insurance company provides financial compensation in the event of a claim by the policy holder.