Question

a) What is underwriting? Describe the underwriting process. Who assumes the risk?
b) What role does a syndicate play in the underwriting process?
c) Investment fund management has become big business in the 1990s. What trends are driving the expansion of this business?

Answer 1

1. Underwriting is the process by which investment bankers raise investment on behalf of corporations & governments that are issuing equity or securities. Insurance is the most common example of underwriting. For insurance to work well, risk must be spread among as many people as possible.

Process of underwriting:

• Issuing a standard premium rate policy to an insured without further request for documentation.
• The company may request for additional information in order to support underwriting decision. Example requesting for additional examination, requesting for past history etc.
• The company may issue a counter offer to the proposed issue.
• Once the company underwrites & accepts the case, it will issue policy with a free look form to the insured.
• If the company doesn’t receive the additional documents within a specified time period, it may terminate the agreement & return the premium to the insured.
• If the insured declines the company’s offer, the company will terminate the application & refund all the premiums to the proposed insured.
• If the company declines the application, the company will notify the insured by letter & refund all the premiums to the proposed insured.

The risk of underwriting usually lies with the underwriter. Underwriting risk may usually arise because of inaccurate assessment of the risks.

1. Role of syndicate:

An underwriter syndicate is formed when a issue is too large to handle. The syndicate is compensated by the underwriting spread which is nothing but the difference between price paid to the issuer & the price that is received from investors & other broker dealers.

An underwriting syndicate usually mitigates the risk for the lead underwriter by spreading the risk among all the participants in the risk.

1. The growing trend for investment fund management business would be more of mergers & acquisitions. All this can broaden the investment management skills & can also result in cost savings.

Other things can include quantitative & analytical techniques such as artificial intelligence & new alternate data sources that helps in providing investment insight.