The underwriters of an investment bank often guarantee a share price to a company during an initial public offering (IPO). They may buy the shares at a certain price and hope to sell them at a higher price. If the bank does not sell the shares at the guaranteed price, it must hold the shares on their books or sell them at a loss. If the shares are in demand, the bank can profit by selling the securities at a higher price.

Insurance underwriters assume the risk involved in a contract with an individual or entity. For example, an underwriter may assume the risk of the cost of a fire in a home 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 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 such as deteriorated roofs or foundations that pose a risk to the carrier. The agents report hazards to the home underwriter. The home underwriter additionally considers hazards that may trigger a liability claim.

Hazards include unfenced swimming pools, cracked sidewalks, and the presence of dead or dying trees on the property. These and other hazards represent risks to an insurance company, which may eventually be required to pay liability claims in the event of accidental drownings or slip and fall injuries.

Inputting a number of factors, which often includes an applicant’s credit rating, homeowner insurance underwriters employ an algorithmic rating method to pricing. The system generates an appropriate premium based on the platform’s interpretation and the combination of all data reported from the observations of the field underwriter. The lead underwriter also subjectively considers answers submitted by the applicant on the policy application when arriving at a premium.

Commercial banking underwriters assess the credit-worthiness of borrowers to decide whether the individual or entity should receive a loan or funding. The borrower is typically charged a fee to cover the lender’s risk if the borrower defaults on the loan.

Medical stop-loss 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 large 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 also evaluate the risk of the group as a whole and calculate an appropriate premium level and aggregate claims limit, which, if exceeded, may cause irreparable financial harm to the employer.