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What Is an Underwriter?

An underwriter is an individual or an entity that takes on a financial risk for another person or entity. The term underwriter is used in the financial sector, in a wide variety of businesses. Perhaps the industry that is most often associated with underwriting and underwriters is the insurance industry.

This is not surprising as the origins of underwriting are rooted in the insurance industry. In fact, the term originates from a practice initiated by Lloyds of London. This historical insurer used to deal with the shipping industry, insuring the vessels. Lloyds would take on the risk for the vessel and its cargo in exchange for payment from the client - basically how insurance operates to this day. Part of the agreement included a list of the risks, under which the backer would sign. This is where the term underwriter came from.

Today, the basic idea remains the same. The underwriter agrees to pay for damages or injuries, if they occur. For example, people take out insurance policies on their homes, cars, health, and so on. The underwriter “promises” to pay the insurance policy holder in case of damage or injury, as outlined in the agreement. Of course, this does not mean that the underwriter will make the payment himself. He is simply representing the insurance company in the transaction.

An underwriter has other tasks, as well. He evaluates and analyzes each potential client and the insurance policy involved. The underwriter examines the profile of the client and everything else necessary to calculate the risk involved. Based on his findings, he will determine the premium required.

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