how underwriting sets the market price
creating a fair and stable market for financial transactions is the chief function of an underwriter every debt instrument insurance policy or ipo carries a certain risk that the customer will default file a claim or fail all sources of potential loss to the insurer or lender a big part of the underwriter s job is to weigh the known risk factors and investigate an applicant s truthfulness to determine the minimum price for providing coverage underwriters help establish the true market price of risk by deciding on a case by case basis which transactions they are willing to cover and what rates they need to charge to make a profit underwriters also help expose unacceptably risky applicants such as unemployed people asking for expensive mortgages those in poor health who request life insurance or companies that attempt an ipo before they are ready by rejecting coverage this vetting function substantially lowers the overall risk of expensive claims or defaults it allows loan officers insurance agents and investment banks to offer more competitive rates to those with less risky propositions 