The underwriting expense ratio is a mathematical calculation used to gauge an insurance company's underwriting success. The formula involves dividing underwriting expenses by total premiums earned to arrive at the percentage of premiums spent on underwriting expenses.
Insurance companies use the underwriting expense ratio to make sure that they are not spending too much money paying out claims and other underwriting expenses. If they are, then that means that they could be decreasing in profitability. So essentially, this figure serves as an indicator of whether the insurer is on the right track to maintain financial solvency and garner profit. Investors also look at this number before investing in a company.
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