Acquisition cost ratio

Category: Underwriting practice · Reviewed by Taylor Watts, Broker · New Business · Last reviewed

Acquisition cost ratio

The acquisition cost ratio is the proportion of earned (or written) premium spent on acquiring business — primarily commission to brokers and MGAs, plus marketing and policy issuance expense.

Formula

Acquisition cost ratio = Acquisition costs / Premium (earned or written)

Components

• Broker commission — the dominant cost in commercial lines.
• MGA / coverholder fees — for delegated authority business.
• Direct marketing spend — for direct-to-consumer carriers.
• Aggregator / price comparison fees — for personal lines via PCWs.
• Sales channel cost — direct sales force in business-to-business.
• Policy origination cost — issuance, documentation, underwriting variable cost.

Typical levels

Strategic significance

The acquisition cost ratio is the principal lever distinguishing direct and broker models. Direct insurers spend more on marketing but save commission; broker channels spend less on marketing but pay distribution. Total acquisition cost ratios are often broadly similar.

References

• ABI statistics.
• Lloyd’s annual report.

Cross-references

• Combined ratio underwriting
• Underwriting profit

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.