Underwriting

In insurance, the process of selecting, classifying, evaluating and assuming risks according to their insurability. Its fundamental purpose is to make sure that the group insured has the same probability of loss and probable amount of loss, within reasonable limits, as the universe on which premium rates were based. Since premium rates are based on an expectation of loss, the underwriting process must classify risks into classes with about the same expectation of loss.


Assuming a risk. In finance, it means assuming the risk of buying a new issue of securities directly from a corporation or government entity, and then reselling them to the public. In insurance, it means assuming the risk of loss in exchange for an amount of money (the premium).


 


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