An underwriter looks at an individual's history and uses mathematical models to determine whether the person should be approved for a financial service, such as loans from banks, insurance applications and securities management. He uses mathematics based on actuarial science to make these determinations.
Actuarial science is the type of mathematics that underwriters use. Actuarial science is the use of mathematics and statistics to assess financial risk, such as the risk that an insurance company might take on for clients who have a poor credit history. Actuarial science teaches students how to look at data and analyze the chances that a certain risk, such as a person dying or losing property, will occur.
A bank underwriter determines whether loan applications, such as mortgages, should be approved. She looks at employment history, income, debt, payment history, credit reports and other relevant factors to determine statistically if a person is likely to be able to pay off his loan and should be approved. If the risk is acceptable, the underwriter approves the loan.
An insurance underwriter evaluates and approves or rejects all kinds of insurance applications, ranging from health insurance to auto insurance, business insurance and life insurance. The underwriter screens applicants and determines the risk of taking an applicant on, using factors such as medical records, past claims, credit scores, a business's funds, past bankruptcies and current financial situations. By assessing risk, underwriters help insurance companies maintain a delicate balance between taking on enough premiums from clients to offset insurance claims while still making a profit.
An underwriter in the securities field determines whether an investment bank will manage a company's public securities, typically an initial public offering. The IPO is the company's first time to sell securities and stock to the general public. If the underwriter makes a firm commitment, this means the bank agrees to buy stock at a discount and resell it at the IPO price. Taking on the shares is a risk, since the bank will suffer a loss if it can't sell all the shares.