What are Underwriting Fees?

Underwriting fees are the amounts charged by underwriters for services rendered. The types of underwriting activities will vary by industry, but a common factor is that the amount is not charged or collectible until the related transaction has closed.

Underwriting Fees in Capital Markets

An investment bank charges underwriting fees to help a business go public or issue securities. Underwriting requires an investment banker to assemble a group of investors or brokerage firms that are willing to take a percentage of the total share offering. The banker may also commit to buying up any excess securities that no one else is willing to buy. The underwriting fees charged may be a mix of fixed and variable charges, where the amount charged is partially based on the amount of money raised. Investment banks charge a substantial fee for this assistance.

A hidden underwriting fee from the perspective of the issuer is that the price set for a securities offering may be too low, so that the issuer takes in less money than could have been the case. For example, shares are sold at $15 per share when the investment community might have paid $25 per share instead. The investment banker may allow this in order to appease its most active investor clients, as well as to advertise the issuance as having been completely subscribed. Low issuance pricing is a continuing source of conflict between issuers and investment bankers.

Underwriting Fees in Insurance

Underwriting fees serve several purposes in the insurance industry and are needed to ensure that an insurer can accurately assess risks and operate efficiently. Here's a breakdown of how underwriting fees are used in insurance:

Risk assessment and evaluation. Underwriting fees cover the cost of assessing the risk associated with insuring an individual, group, or entity. This process involves:
- Analyzing the applicant's information, such as health records, financial history, or property details.
- Utilizing data analytics, models, and actuarial science to predict potential claims.
- Determining whether the applicant is insurable and at what premium rate.
Operational costs. The underwriting process often involves multiple steps and parties, including:
- Salaries of underwriters and support staff.
- Expenses related to technology systems used for data analysis and risk evaluation.
- Costs of obtaining external reports (e.g., medical exams, property inspections, or credit checks).
Profitability management. Insurance companies use underwriting fees to:
- Offset the cost of evaluating applications that do not result in approved policies.
- Ensure that the business remains financially viable by covering administrative costs and contributing to the overall operational budget.
Compliance and regulation. Underwriting often involves adhering to strict regulatory standards. Fees help cover:
- Legal and compliance checks to ensure policies meet industry regulations.
- Updating policies and underwriting criteria based on changes in laws or market conditions.
Compensation for brokers and agents. In some cases, underwriting fees include a portion paid to insurance brokers or agents who assist in facilitating the application process and underwriting evaluation.

In summary, underwriting fees are used to ensure the thorough evaluation of risk, maintain the insurer's financial health, and deliver efficient, compliant insurance services.

Underwriting Fees in Lending

A lender will frequently charge an underwriting fee to a borrower. This fee is intended to cover the cost of evaluating the ability of the borrower to pay back the prospective loan, as well as to process the related loan paperwork. This fee is generally charged at the loan closing, and is calculated as a percentage of the amount being lent. A lender’s underwriting fee is also known as an origination fee.