Underwriters are needed to identify and calculate the risk of loss from policyholders, establish appropriate premium rates, and write policies that cover this risk.
Most underwriters are based in the insurance companys home office, but some, mainly in the property and casualty area, work out of regional branch offices of the insurance company.
Underwriters are needed particularly in the area of product development, where they assess risks and set the premiums for new lines of insurance.
Underwriters usually maintain a secondary market in the securities they issue, which means they agree to purchase or sell securities out of their own inventories in order to keep the price of the securities from swinging wildly.
Underwriters often mitigate this risk by forming a syndicate whose members each share a portion of the shares in return for a portion of the fee.
Underwriters work hard to determine the “right” price for an offering, but sometimes they “leave money on the table.” For example, if XYZ Company prices its 10-million-share IPO at $15 per share but the shares trade at $30 two days after the IPO, this suggests that the underwriter probably underestimated the demand for the issue.
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