INTRODUCTION:

Financial bankers, who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium, would literally write their names under the risk information that was written on a Lloyd's slip created for this purpose.¹

Securities underwriting refers to the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The services of an underwriter are typically used during a public offering.

This is a way of selling a newly issued security, such as stocks or bonds, to investors. A syndicate of banks (the lead managers) underwrites the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, they will have to hold some securities themselves. Underwriters make their income from the price difference (the "underwriting spread") between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering. Risk, exclusivity, and reward. Once the underwriting agreement is struck, the underwriter bears the risk of being unable to sell the underlying securities, and the cost of holding them on its books until such time in the future that they may be favourably sold.

If the instrument is desirable, the underwriter and the securities issuer may choose to enter into an exclusivity agreement. In exchange for a higher price paid upfront to the issuer, or other favorable terms, the issuer may agree to make the underwriter the exclusive agent for the initial sale of the securities instrument. That is, even though third-party buyers might approach the issuer directly to buy, the issuer agrees to sell exclusively through the underwriter.

In summary, the securities issuer gets cash up front, access to the contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price. The underwriter gets a nice profit from the markup, plus possibly an exclusive sales agreement.

Also, if the securities are priced significantly below market price (as is often the custom), the underwriter also curries favor with powerful end customers by granting them an immediate profit (see flipping), perhaps in a quid pro quo. This practice, which is typically justified as the reward for the underwriter for taking on the market risk, is occasionally criticized as unethical, such as the allegations that Frank Quattrone acted improperly in doling out hot IPO stock during the dot com bubble.

Bank Underwriting

In banking, underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower; such underwriting falls into several areas: (a) Consumer loan underwriting includes the verification of such items as employment history, salary and financial statements; publicly available information, such as the borrower's credit history, which is detailed in a credit report; and the lender's evaluation of the borrower's credit needs and ability to pay. Examples include mortgage underwriting. (b) Commercial (or business) underwriting consists of the evaluation of financial information provided by small businesses including analysis of the business balance sheet including tangible net worth, the ratio of debt to worth (leverage) and available liquidity (current ratio). Analysis of the income statement typically includes revenue trends, gross margin, profitability, and debt service coverage (see Debt Service Coverage Ratio).

Underwriting can also refer to the purchase of corporate bonds, commercial paper, government securities, municipal general-obligation bonds by a commercial bank or dealer bank for its ownaccount or for resale to investors. Bank underwriting of corporate securities is carried out through separate holding-company affiliates, called securities affiliates or Section 20 affiliates.

Insurance underwriting

Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk.

Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. For example, in underwriting automobile coverage, an individual's driving record is critical.[citation needed] As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.²

The underwriters may either decline the risk or may provide a quotation in which the premiums have been loaded or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business), insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance. Some insurance companies, however, rely on agents to underwrite for them. This arrangement allows an insurer to operate in a market closer to its clients without having to establish a physical presence.

Other forms of underwriting

Real estate underwriting

In evaluation of a real estate loan, in addition to assessing the borrower, the property itself is scrutinized. Underwriters use the debt service coverage ratio to figure out whether the property is capable of redeeming its own value or not.

Forensic underwriting

Forensic underwriting is the "after-the-fact" process used by lenders to determine what went wrong with a mortgage.³ Forensic underwriting refers to a borrower's ability to work out a modification scenario with their current lien holder, not to qualify them for a new loan or a refinance. This is typically done by an underwriter staffed with a team of people who are experienced in every aspect of the real estate field.

Sponsorship underwriting

Main article: Underwriting spot

Underwriting may also refer to financial sponsorship of a venture, and is also used as a term within public broadcasting (both public television and radio) to describe funding given by a company or organization for the operations of the service, in exchange for a mention of their product or service within the station's programming.

1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).

2. The process of issuing insurance policies.

The word "underwriter" is said to have come from the practice of having each risk-taker write his or her name under the total amount of risk that he or she was willing to accept at a specified premium. In a way, this is still true today, as new issues are usually brought to market by an underwriting syndicate in which each firm takes the responsibility (and risk) of selling its specific allotment.

Assurance service is an independent professional service, typically provided by CPAs, with the goal of improving the information or the context of the information so that decision makers can make more informed, and presumably better decisions. Assurance services provide independent and professional opinions that reduce the information risk (risk that comes from incorrect information).⁴

Underwriting is an agreement, entered into by a company with a financial agency, in order to ensure that the public will subscribe for the entire issue of shares or debentures made by the company. The financial agency is known as the underwriter and it agrees to buy that part of the company issues which are not subscribed to by the public in consideration of a specified underwriting commission. The underwriting agreement, among others, must provide for the period during which the agreement is in force, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue after being intimated by the issuer, the amount of commission and details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations. The underwriting commission may not exceed 5 percent on shares and 2.5 percent in case of debentures. Underwriters get their commission irrespective of whether they have to buy a single security or not.

Importance of Underwriting

Underwriting has become very important in recent years with the growth of the corporate sector. It provides several benefits to a company:-

· It relieves the company of the risk and uncertainty of marketing the securities.

· Underwriters have an intimate and specialised knowledge of the capital market. They offer valuable advice to the issuing company in the preparation of the prospectus, time of floatation and the price of securities, etc. They also provide publicity service to the companies which have entered into underwriting agreements with them.

· It helps in financing of new enterprises and in the expansion of the existing projects.

· It builds up investors' confidence in the issue of securities. The association of well-known underwriters lends prestige to the company and the investors feel that the issue is sound enough for profitable investment. Also, the securities underwritten by reputed underwriters receive better response from the public.

· The issuing company is assured of the availability of funds. Important projects are not delayed for want of funds.

· It facilitates the geographical dispersal of securities because generally, the underwriters maintain contacts with investors throughout the country.

Types of underwriting

· Syndicate Underwriting:- is one in which, two or more agencies or underwriters jointly underwrite an issue of securities. Such an arrangement is entered into when the total issue is beyond the resources of one underwriter or when he does not want to block up large amount of funds in one issue.

· Sub-Underwriting:- is one in which an underwriter gets a part of the issue further underwritten by another agency. This is done to diffuse the risk involved in underwriting. The name of every under-writer is mentioned in the prospectus along with the amount of securities underwritten by him.

· Firm Underwriting:- is one in which the underwriters apply for a block of securities. Under it, the underwriters agree to take up and pay for this block of securities as ordinary subscribers in addition to their commitment as underwriters. The underwriter need not take up the whole of the securities underwritten by him. For example, if the underwriter has underwritten the entire issue of 5 lakh shares offered by a company and has in addition applied for 1 lakh shares for firm allotment. If the public subscribes to the entire issue, the underwriter would be allotted 1 lakh shares even though he is not required to take up any of the shares.

Types of underwriters

Underwriting of capital issues has become very popular due to the development of the capital market and special financial institutions. The lead taken by public financial institutions has encouraged banks, insurance companies and stock brokers to underwrite on a regular basis. The various types of underwriters differ in their approach and attitude towards underwriting:-

· Development banks like IFCI, ICICI and IDBI:- they follow an entirely objective approach. They stress upon the long-term viability of the enterprise rather than immediate profitability of the capital issue. They attempt to encourage public response to new issues of securities.

· Institutional investors like LIC and AXIS:- their underwriting policy is governed by their investment policy.

· Financial and development corporations:- they also follow an objective policy while underwriting capital issues.

· Investment and insurance companies and stock-brokers:- they put primary emphasis on the short term prospects of the issuing company as they cannot afford to block large amount of money for long periods of time.

To act as an underwriter, a certificate of registration must be obtained from Securities and Exchange Board of India (SEBI) . The certificate is granted by SEBI under the Securities and Exchanges Board of India (Underwriters) Regulations, 1993. These regulations deal primarily with issues such as registration, capital adequacy, obligation and responsibilities of the underwriters. Under it, an underwriter is required to enter into a valid agreement with the issuer entity and the said agreement among other things should define the allocation of duties and responsibilities between him and the issuer entity. These regulations have ben further amended by the Securities and Exchange Board of India (Underwriters) (Amendment) Regulations, 2006.

In investment banking, an underwriting contract is a contract between an underwriter and an issuer of securities.

The following types of underwriting contracts are most common:⁵

In the firm commitment contract the underwriter guarantees the sale of the issued stock at the agreed-upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale.⁶

In the best efforts contract the underwriter agrees to sell as many shares as possible at the agreed-upon price.⁷

Under the all-or-none contract the underwriter agrees either to sell the entire offering or to cancel the deal.

Stand-by underwriting, also known as strict underwriting or old-fashioned underwriting is a form of stock insurance: the issuer contracts the underwriter for the latter to purchase the shares the issuer failed to sell under stockholders' subscription and applications.⁸

Assurance Service

Audits can be considered a type of assurance services. However audits are only designed to test the validity of the financial statements. Under an assurance engagement, accountants can provide a variety of services ranging from information systems security reviews to customer satisfaction surveys. Unlike audit and attestation services that are often highly structured, assurance services tend to be customized and implemented when performed for a smaller group of decision makers within the firm. Often managers must make decisions on things they have incomplete or inaccurate data for, and decisions made on such data may be incorrect and increase the overall business risk. In this respect, assurance services can be very helpful in reducing such risk and help managers or decision makers make more confident decisions within a given firm. This is similar to audits in that investors will choose to invest in a firm that is publishing financial statements that have been audited by an independent firm.

Assurance services can test financial and non-financial information; due to this assurance services can be classified as consulting services. However, assurance services are not considered consulting⁹ because in consulting services generally, an accountant uses their professional knowledge to make recommendations for a future event or a procedure, such as the design of an information system or accounting control system. In contrast, assurance services are designed to test the validity of past data of the business cycles. Although there is no boundary to what an accountant can test in assurance services, a practitioner is discouraged from accepting an assurance engagement in which his firm or previous experiences does not provide them with enough expertise to make a professional opinion on the given data.¹⁰

Assurance services done by accountants differ from non assurance services.

Other examples of assurance services include:

· Accounts receivable review

· Business risk assessment

· Comfort letter

· Customer satisfaction survey

· Information systems security review

· Internal audit outsourcing

Definition of 'Assurance Services'

A type of professional service usually provided by CPAs. Assurance services can include review of any kind of financial document or transaction, such as a loan, contract or financial website. This review certifies the correctness and validity of the item being reviewed by the CPA.

Explanation: Assurance services can come in variety of forms and are meant to provide the firm contracting the CPA with pertinant information in order to ease decision making. For example, the client could request that the CPA carefully go over all of the numbers and math that are on the client's mortgage website to ensure that all of the calculations and equations are correct.

Insurance and Assurance sounding similar; the words insurance and Assurance are commonly used by companies selling financial products. The two terms Insurance and Assurance are very confusing in financial world. When it comes to choosing financial products from insurance companies to safeguard interests of a person or an object, many companies prefer to use the word assurance as against insurance used by others. The person concerned is more interested in knowing the details of the policy rather than terminology, and hence it doesn’t really matter whether the policy refers to itself as assurance or insurance. These terms are irrelevant if the cover is right for the person or the object.

Insurance

If we look up in a dictionary, the word Insurance refers to means of guaranteeing protection of an object or a person, or a guarantee against loss or damage. People getting this insurance or protection have to pay premiums or instalments monthly or yearly to the company which undertakes to pay in the event of loss or damage or death. There are various types of insurance products available in the market such as health insurance, life insurance, home insurance etc. In fact, companies have been insuring everything under the sun these days, even body parts such as breasts, legs, denture and voice are being insured.

In life insurance alone, there are policies that provide cover only and the family of the person receive the amount in the event of death of the person and nothing if he survives the period of the policy. But majority of people go for insurance policies of limited time period where they receive the amount proposed along with bonus that has accrued at the end of the term of the policy.

Assurance

Assurance, according to dictionary means making someone feel comfortable with a decision and clearing his doubts. If you are assuring someone, you are instilling confidence in him. When a person takes life assurance policy, he gets a cover for his entire life, no matter when his life ends. Every premium that he pays to the company adds to the value of the policy, ands when this added up value equals the death benefit that the person has been assured, the policy is said to have matured. In life assurance, a person can choose to cash out his policy anytime he so desires.

Difference between Insurance and Assurance

Both insurance and assurance are financial products offered by companies operating commercially but of late the distinction between the two has increasingly become blurred and the two are taken to be somewhat similar. However, there are subtle differences between the two which are as follows.

Insurance policy refers to protection against an event that might happen whereas assurance policy refers to protection against an event that will happen. This means that insurance policy is taken to prevent a risk or provide cover against a risk while assurance policy is taken against an event that is definite.

Assurance policies are undertaken by people knowing that their death is certain. They keep on paying premiums knowing that their heirs will receive a big amount whenever they die. Company issuing assurance policy is assured of the death of the person and also that it has to pay the amount whenever the person dies. Because of this assurance factor, such a policy is called assurance policy.

In case of insurance policy, the company pays the amount to the dependants of the person if all the premiums have been paid on time and the person dies within the duration of the policy. In most of the cases, the person does not die within the term of the policy, hence it is called life insurance.

Insurance Policy

Assurance Policy

Protection against an event that might happen

In life insurance, the dependants receive the policy if all premiums paid on time and the person dies within the duration of policy.

Protection against an event that is definite

In life assurance, a person can choose to cash out his policy anytime he so desires.

CONCLUSION:

Insurance refers to means of guaranteeing protection of an object or a person, or a guarantee against loss or damage. People getting this insurance or protection have to pay premiums or installments monthly or yearly to the company which undertakes to pay in the event of loss or damage or death. Assurance, according to dictionary means making someone feel comfortable with a decision and clearing his doubts. If you are assuring someone, you are instilling confidence in him. When a person takes life assurance policy, he gets a cover for his entire life, no matter when his life ends.In some parts of the world life insurance is referred to as life assurance. "Assurance" would be protection against the financial loss arising from life contingencies such as premature death. Where indemnity insurance such as fire insurance, auto insurance or liability insurance would described by the term "insurance". However, in the United States there is no distinction drawn between the two terms, they are interchangeable.

REFERENCES:

1. This section draws heavily from the history of Indian corporate governance in OmkarGoswami, 2002, “Corporate Governance in India,” Taking Action Against Corruption in Asia and the Pacific (Manila: Asian Development Bank), Chapter 9.

2. "Risk Classification (for All Practice Areas)," Actuarial Standard of Practice No. 12, Actuarial Standards Board, December 2005

3. "Lenders scrutinize borrowers," Herald TribuneMarch 12, 2008

4. "Welcome to Assurance Services". American Institute of Certified Public Accountants. Archived from the original on 5 December 2006. Retrieved 14 June 2010.

5. JayatiSarkar and SubrataSarkar, 2000. Large Shareholder Activism in Developing Countries: Evidence from India,” International Review of Finance,1, pp. 161-94.

6. "The Investment Banking Handbook" by J. Peter Williamson, 1988, ISBN 0-471-81562-4 , ""Underwriting Contracts", p. 128

7. Sonja Fagernas, 2007, “How do Family Ties, Boards and Regulation Affect Pay at the Top? Evidence for Indian CEOs?”Working Paper, University of Cambridge.

8. "The Law of Securities Regulation" by Thomas Lee Hazen, 1996, ISBN 0-314-08587-4, p. 405.

9. "SSAE #10 Attest Engagements, AT §101, clause .21, second general standard.". American Institute of Certified Public Accountants

10. "International Standard on Assurance Engagements (ISAE) 3402, §13(a)(i)". International Auditing and Assurance Standards Board.

Received on 10.01.2014 Modified on 28.02.2014

Int. J. Rev. & Res. Social Sci. 2(1): Jan. – Mar. 2014; Page 38-42