The term underwriting originated in insurance business in
seventeenth century inEngland. Underwriters wrote their names below proposed insurance
contracts for ships and cargo, in confirmation of their obligation to share part of the
insurance risk. Thus the term came to be used for any person or firm that accepts the
obligation to share the risk of any insurance contract or business. The underwriters, as
a part of guarding their business interests, also perform some other functions
associated with insurance business. For example, determining the risk associated with
various kind of policies and premium rates to be charged. Such functions are now also
performed in insurance companies by an internal underwriting
department.
The use of term underwriting has now been
extended to the function of sharing financial risks other than insurance. For example,
an underwriter may agree to buy unsubscribed portion of bonds or shares of a company
offered for sale to general public in a public offer. An underwriting arrangement like
this is intended to instill confidence in public about the value of bonds or shares
offered for sale.
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