Underwriting Expenses

What Does Underwriting Expenses Mean?

Underwriting expenses are the costs an insurance company incurs to maintain its operations. These expenses are subtracted from the company’s income to calculate its net profit. Underwriting expenses can encompass a wide range of costs and are also used to calculate the expense ratio. The expense ratio determines the percentage of premiums earned during a given period that must be allocated to underwriting expenses.

Insuranceopedia Explains Underwriting Expenses

Although insurance companies generate substantial income from premiums, they also have various expenses necessary to operate their businesses. These include salaries, actuarial reviews, advertising fees, commissions, and more. For example, many insurance companies advertise on television, and these advertisements are just one of many underwriting expenses. Once these expenses are covered, the remaining income can be retained as profit. If underwriting expenses are significantly lower than the income generated, the insurance company can achieve substantial gains.

These costs are also baked into the premiums that policyholders pay. Insurers account for underwriting expenses when setting their rates, which is one reason premiums vary so much between companies. You can see how this pricing works in practice in our breakdown of how business insurance premiums are calculated. Similar cost factors apply to personal lines as well, including the many factors that affect life insurance premiums.