Underwriting is the process of evaluating risk and deciding whether to take it on — and at what price. It exists in three major areas: insurance underwriting (assessing policy risk), securities underwriting (guaranteeing an IPO or bond issue sells), and loan underwriting (evaluating borrower creditworthiness).
In IPOs, investment banks act as underwriters. They buy all shares from the company at an agreed price and resell them to investors. If the IPO flops, the underwriter absorbs the loss. Goldman Sachs, JPMorgan, and Morgan Stanley are the top IPO underwriters globally. Underwriting fees for IPOs typically run 3-7% of the total raised.
In insurance, underwriters determine premium pricing based on actuarial data and risk assessment. A 25-year-old non-smoker pays less for life insurance than a 55-year-old smoker — that is underwriting at work. The insurance industry collects over $6 trillion in premiums globally, and underwriting accuracy determines profitability.