# What Is an Insurance Underwriter and What Do They Do?

> **Definition**
>
> An insurance underwriter is a specialist who assesses the potential risks of providing coverage for individuals or property and determines the appropriate cost of that coverage.

## What Is an Insurance Underwriter?

Insurance underwriters are industry experts who measure the risks associated with insuring people and assets. [Insurance](https://www.investopedia.com/the-best-small-business-insurance-11686113) underwriters establish pricing for accepted insurable risks. The term underwriting means receiving remuneration for the willingness to pay for a potential risk. [Underwriters](https://www.investopedia.com/terms/u/underwriter.asp) use specialized software and actuarial data to determine the likelihood and magnitude of a risk.

### Key Takeaways

*   Insurance underwriters assume the risk of a future event and charge premiums in return for a promise to reimburse the client an amount for a covered event.
*   Underwriters in investment banking guarantee a minimum share price for a company planning an initial public offering (IPO).
*   Commercial banking underwriters assess the risk of lending to individuals or lenders and charge interest to cover the cost of assuming that risk.  
    

![Insurance Underwriter](https://www.investopedia.com/thmb/ekRMazxBTL18O2jR6V6s68jCYlc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/insurance-underwriter.asp-final-0e106b06a1c2405d9add3a36946690fd.png)

*Insurance underwriters typically work for insurance companies and insurance brokerages. — Investopedia / Theresa Chiechi*

## Investment Banking Underwriters

The underwriters of an investment bank often guarantee a specified amount of capital to a corporation during an [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp), an amount that investors provide as the source of capital. The bank acts only as the "facilitator" of the transaction. However, they have still taken on an "underwriting risk" by promising to provide those proceeds of the sale to the client, regardless of the success or failure of the sale of its company's shares.

## Insurance Underwriters

Insurance underwriters assume the risk involved in a contract with an individual or entity in return for a premium or a monthly payment. Evaluating an insurer's risk before the policy period and at the time of renewal is a vital function of an underwriter.

For example, [homeowners' insurance](https://www.investopedia.com/terms/h/homeowners-insurance.asp) underwriters must consider numerous variables when rating a homeowner's policy. Property and casualty insurance agents act as field underwriters, initially inspecting homes or rental properties for conditions that pose a risk to the carrier.

The agents report hazards to the home underwriter, who considers the hazards that may trigger a liability claim. Hazards include accidental drownings due to unfenced swimming pools, slip and fall injuries due to cracked or icy sidewalks, and dead or dying trees on the property.

Inputting several factors, such as an applicant's [credit rating](https://www.investopedia.com/terms/c/creditrating.asp), [homeowner insurance](https://www.investopedia.com/how-to-save-on-homeowners-insurance-5075164) underwriters employ an algorithmic rating method for pricing. The system generates an appropriate premium based on the data reported from the observations of the field underwriter. The lead underwriter may also consider information submitted by the applicant when determining the monthly premium.

> **Important**
>
> Insurance companies must balance their approach to underwriting: if too aggressive, greater-than-expected claims could compromise earnings; if too conservative, they may lose market share due to their competitors outpricing them.

## Commercial Banking Underwriters

[Commercial banking](https://www.investopedia.com/articles/professionals/091615/career-advice-investment-banking-vscommercial-banking.asp) underwriters assess the [creditworthiness](https://www.investopedia.com/terms/c/credit-worthiness.asp) of borrowers to decide whether the individual or entity should receive a loan or funding. The lender charges a fee to [cover the risk](https://www.investopedia.com/articles/pf/08/business-insurance-coverage.asp) of the borrower defaulting on the loan.

## Medical Stop-Loss Underwriters

Medical [stop-loss](https://www.investopedia.com/terms/a/aggregate-stop-loss-insurance.asp) underwriters assess risk based on the individual health conditions of self-insured employer groups. Stop-loss insurance protects groups that pay their own health insurance claims for employees rather than paying premiums to transfer all of the risk to an insurance carrier.

Self-insured entities pay medical and prescription drug claims plus administration fees out of company reserves and assume the risk posed by the potential for significant or catastrophic losses, such as organ transplants or cancer treatments. Underwriters for self-insured entities must thus assess the individual medical profiles of employees.

[Underwriters](https://www.investopedia.com/ask/answers/020915/how-do-i-become-underwriter.asp) also evaluate the group's risk as a whole and calculate an appropriate premium level and aggregate claims limit, which, if exceeded, may cause irreparable financial harm to the employer.

## What Is the Difference Between an Insurance Agent and an Underwriter?

Insurance agents sell insurance or financial protection to their customers for events covered by the policy. Underwriters assess the risk to the insurer associated with the policy, meaning how likely a covered event may occur. Underwriters help determine the monthly premium cost to charge the customer to compensate the [insurer](https://www.investopedia.com/the-best-short-term-rental-insurance-11688669) for their risk. 

## Do Underwriters Speak With Clients?

Typically, underwriters do not speak with clients. Instead, they assess the risk of providing the financial product or service, such as [insurance](https://www.investopedia.com/the-best-whole-life-insurance-8763569) or a loan.

## What Is the Purpose of Insurance?

[Insurance](https://www.investopedia.com/the-best-contractor-liability-insurance-11704267) provides protection for a covered event listed in the policy. In return, customers typically pay a premium for the coverage to the insurer. [Insurance](https://www.investopedia.com/the-best-general-liability-insurance-for-small-business-11687353) provides financial compensation to businesses and people to cover the cost of an unforeseen event, such as a flood or fire.

## The Bottom Line

Insurance underwriters evaluate the risks of providing insurance to determine the cost for the risk of claims for covered events, such as flood or fire, in the case of a home. Investment banking underwriters help facilitate and guarantee a minimum share price for a company going public or an initial public offering (IPO). Underwriters in banking assess the risk of how likely a borrower may default on a loan when determining pricing, such as the interest rate.