Category: Underwriting practice · Reviewed by Amy Price, Account Executive · Last reviewed
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.
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.
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.
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.
Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.
Apex Insurance Brokers serves UK professional services firms and commercial businesses. Call 0117 325 0027, email hello@apexinsurancebrokers.co.uk, or request a quotation.
Get a quote