Underwriting profit

Category: Underwriting practice · Reviewed by Amy Price, Account Executive · Last reviewed

Underwriting profit

Underwriting profit is earned premium less incurred losses and underwriting expenses, before investment return and finance costs. It is the technical profitability of the (re)insurance activity itself.

Formula

Underwriting profit = Net earned premium − Net incurred losses − Net underwriting expenses

It is most often expressed as a combined ratio (the inverse):

Combined ratio = (Incurred losses + Expenses) / Earned premium

A combined ratio of 95% implies a 5% underwriting margin; 105% implies a 5% underwriting loss.

Operating profit vs underwriting profit

Many insurers report a positive operating profit despite an underwriting loss, because investment income on float (premium received but not yet paid in claims) more than offsets the underwriting deficit. This is the classic Warren Buffett observation about float as cheap capital.

Strategic importance

In a low-yield environment, underwriting profit becomes the dominant component of overall return. In a high-yield environment, insurers can afford to write business at a small underwriting loss provided the investment return on float is high enough.

References

• ABI annual statistical returns.
• Lloyd’s annual report.
• Buffett, W. (various). Berkshire Hathaway annual letters.

Cross-references

• Combined ratio underwriting
• Loss ratio underwriting
• Acquisition cost ratio

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