What it says in the title!
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Underwriting is the act of providing insurance for something – a “risk”
The term comes from how the insurance certificate was signed at the bottom of the paper (“the slip”) by those accepting to cover the risk – “the under – writers”
Underwriters look at a risk (say “a large commercial property in florida”) and makes more or less informed estimations on how likely that thing is to suffer a loss against various dangers “perils”, such as e
g. fire, floods, hurricanes, theft etc
If they think you have a 10% chance of having a 1,000 loss, then the insurance will cost 100 (plus some markup for admin etc).
On some things, like car insurance, the underwriting is very sophisticated and data driven
we know a lot about what kinds of cars and drivers have crashes at different roads, times of days etc.
on other things, say space missions, there isn’t a lot of data, and the underwriting is more of a guesswork.
It’s important in the world of finance because a lot of financing is dependent upon having insurance in place. “I’m willing to invest 100m to build this pipeline, but if something blows up or we get sued or permissions are withdrawn, I don’t want to loose everything, so I will only invest in this project if you have the right insurance in place”
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