Underwriting is a term first used in England in the 1600’s. Underwriters (insurers) wrote their names at the bottom of proposed insurance contracts covering a ship and its cargo. They indicated in this way their willingness to assume part of the risk. Today, every insurance company has an underwriting department which is important to the success of the company. Underwriting experts must determine the premium rates for various kinds of insurance policies and the amount and degree of risk to be assumed for each policy.
Underwriters also examine all applications for insurance in order to guard against bad risks and to prevent the company from assuming too many of the same kinds of risks. For example, a fire insurance underwriter may find that several suspicious fires have occurred in the building to be insured. On the basis of this finding, the underwriter may decide the risk is bad.
In finance, the term underwriting has another meaning. It is an agreement to purchase a corporation stock or bond issue.
