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[Music] under riding services are provided by some large specialist financial institutions such as banks insurance or investment houses whereby they guarantee payment in case of damage or financial loss and accept the financial risk or liability arising from such guarantee an underwriting arrangement may be created in a number of situations including insurance issue of securities in primary markets and in bank lending among others the name derives from the Lloyds of London insurance market financial bankers who would accept some of the risk on a given venture historically a sea voyage with associated risks of shipwreck in exchange for a premium would literally write their names under the risk information that was written on a Lloyd's slip created for this purpose securities underwriting refers to the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities both equity and debt capital the services of an underwriter are typically used during a public offering in a primary market this is a way of distributing a newly issued security such as stocks or bonds to investors a syndicate of banks believes managers endure writes the transaction which means they have taken on the risk of distributing the securities should they not be able to find enough investors they will have to hold some securities themselves underwriters make their income from the price difference the 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 once the underwriting agreement is struck the underwriter bears the risk of being unable to sell the underlying securities and the cost of holding them on its books until such time in the future that they may be favorably old if the instrument is desirable the underwriter and the securities issuer may choose to enter into an exclusivity agreement in exchange for a higher price paid up fund to the issuer or other favourable terms the issuer may agree to make the underwriter the exclusive agent for the initial sale of the securities instrument that is even though third-party buyers might approach the issuer directly to by the issuer agrees to sell exclusively through the underwriter in summary the securities issuer gets cash upfront access to the contacts and sales channels of the underwriter and is insulated from the market risk of being unable to sell the securities at a good price the underwriter gets a profit from the markup plus possibly an exclusive sales agreement also if the securities are priced significantly below market price as is often the custom the underwriter also curries favor with powerful and customers by granting them an immediate profit see slipping perhaps in a quid pro quo this practice which is typically justified as the reward for the underwriter for taking on the market risk is occasionally criticized as unethical such as the allegations that Frank Cointreau nee acted improperly in doling out hot IPO stock during the.com bubble in banking underwriting is the detailed credit analysis preceding the granting of a loan based on credit information furnished by the borrower such underwriting falls into several areas consumer loan underwriting includes the verification of such items as employment history salary and financial statements publicly available information such as the borrower's credit history which is detailed in a credit report and the lenders evaluation of the borrower's credit needs and ability to pay examples include mortgage underwriting commercial or business underwriting consists of the evaluation of financial information provided by small businesses including analysis of the business balance sheet including tangible net worth the ratio of debt to words leverage and available equator the current ratio analysis of the income statements typically includes revenue trends gross margin profitability and debt service coverage underwriting can also refer to the purchase of corporate bonds commercial paper government securities municipal general obligation bonds by a commercial bank or dealer bank for its own account or for resale to investors bank underwriting of corporate securities is carried out through separate holding company affiliates called securities affiliates or section 20 affiliates 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 even to accept the risk and insure them underwriting involves measuring risk exposure I'm determining the premium that needs to be charged to insure that risk the function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk the information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved for example in underwriting automobile coverage an individual's driving record is critical however the type of automobile is actually far more critical as part of the underwriting process for life or health insurance medical underwriting may be used to examine the applicant's health status other factors may be considered as well such as age and occupation the factors that insurers use to classify risks are generally objective clearly related to the likely cost of providing coverage practical to administer consistent with applicable law and designed to protect the long-term viability of the insurance program the underwriters may decline the risk or may provide a quotation in which the premiums have been including the amount needed to generate a profit in addition to covering expenses or in which various exclusions have been stipulated which restrict the circumstances under which a claim would be paid depending on the type of insurance product line of business insurance companies use automated underwriting systems to encode these rules and reduce the amount of manual work in processing quotations and policy issuance this is especially the case for certain simpler life or personal lines Auto homeowner's insurance some insurance companies however rely on agents to underwrite for them this arrangement allows an insurer to operate in a market closer to its clients without having to establish a physical presence two major categories of exclusion and insurance underwriting are moral hazard and correlated losses with a moral hazard the consequences of the customer's actions are insured making the customer more likely to take costly actions for example bedbugs are typically excluded from homeowners insurance to avoid paying for the consequence of recklessly bringing in a used mattress insured events are generally those outside the control of the customer for example typical in life insurance death by automobile accident contrasted with death by suicide correlated losses are those that can affect a large number of customers at the same time that's potentially bankrupting the insurance company this is why typical homeowners policies cover damage from fire or falling trees usually affecting an individual house but not floods or earthquakes which affect many houses at the same time [Music]