What Does Underwriting Profit Mean?
Underwriting profit is the net of premiums an insurer receives, minus losses paid out and administrative expenses over a given period. It does not include the gains made from invested premiums.
Insuranceopedia Explains Underwriting Profit
The role of an insurance firm is to provide financial coverage against risks to willing clients. In return, the clients pay a fee termed as premiums. For example, an insurance company offering auto insurance relies on the premiums paid to compensate any losses claimed. Since not every client makes a claim, the insurance firm can pool together the earned premiums to cover significant losses. The surplus is invested in income-generating projects for the firm. Underwriting losses arise when the claims exceed the earned premiums or due to major disasters, such as earthquakes and floods, that led to extraordinary and numerous claims. Expenses, on the other hand, arise due to mandatory needs, such as administration expenses, rental expenses, among others. Therefore, underwriting profit is realized after taking into consideration the cash inflow from premiums and outflow on paying out claims and other expenses. Underwriting profit is often used as a measure of the success of an insurance firm.