What is underwriting?

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products like equity capital, insurance, mortgage or credit to a customer.

Securities underwriting

Securities underwriting is the way business customers are assessed by investment houses for access to either equity or debt capital.

When an Investment Bank raises money for a company they will use an underwriter in order to guarantee the purchase of securities in the event that nobody else will purchase.

This is a way of placing a newly issued security, such as stocks or bonds, with investors. A syndicate of banks underwrite the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, then they end up holding some securities themselves. Underwriters make their income from the price difference, or underwriting spread, between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering.

Insurance underwriting

Underwriting may also refer to insurance; insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether to even accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to acquire—or to “write”—business that will make the insurance company money, and to protect the company’s book of business from risks that they feel will make a loss.

If I work in underwriting what will I be doing?

Securities Underwriting

If the investment bank and company reach an agreement to do an underwriting—also known as a firm commitment—then the investment bank will buy the new securities for an agreed price. It will be your job to facilitate this transaction.

You will be registering the new securities with the London Stock Exchange, setting the offering price, possibly forming and managing a syndicate to help sell the new securities, and to peg the price of the new issue by buying in the open market, if necessary.

One of the biggest tasks of an underwriter is determining the price of the transaction. If the offer price is too high, the investment bank will fail to sell all of the new issue (aka undersubscription), then it will have to hold some of the issue in inventory, hoping to sell it later. If the investment bank holds the new issue in inventory, this will tie up capital that can be used elsewhere, or, worse yet, it will have to borrow money.

If this happens you will have to answer to the initial customers who paid a higher price for the new issue who will be disappointed that they paid a higher price, and the investment bank may lose these customers in a future offering. You will be reporting back to investors throughout the transaction.

If the offering price is too low, then the new issue will quickly sell out, and the price of the new issue will rise quickly because the supply will be limited (aka oversubscription), inducing the initial investors to sell for quick profits—commonly called flipping.

Essentially your job is to evaluate risks, use financial modelling to come up with an underwriting level and facilitate the transaction.

Insurance Underwriting

Underwriting work is largely about relationship building and it demands close attention to detail. You are likely to be involved in networking to get things done, gathering and assessing information, studying proposals and, for any given scenario, calculating possible risk, weighing up the likelihood of a claim being made and in what timeframe.

Underwriters compute results to determine the cost of insurance and decide whether the risk is viable. You might also find yourself liaising with specialists, negotiating terms with policyholders or brokers, specifying conditions for certain types of cover, and drawing up policies and contracts.

How do I get a graduate scheme / internship / entry level job or career in Underwriting?

Obtaining a graduate scheme, internship or entry level role in underwriting can be very challenging and competitive – though very achievable by getting your application, CV, interview and general approach right. You can guarantee that ninety percent of applicants for underwriting roles will not know how to apply, so getting your application in the top ten percent makes things a lot more achievable.

Approaching the company in the right way will make all the difference. Combining the right approach with a strong interview (and in some cases assessment centre) writ a strong focused tailored CV will go a long way. Make sure you have gone through the free videos on this sight by entering your name and email address in the top right of this screen underneath the video. Once you have filled this in you will have instant access to everything you need to secure your career in underwriting.

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