Underwriting income is the total amount of money that an insurance company nets from insurance premiums once claims and operating expenses have been deducted. It is not usually the same as the company’s overall profit, but it is usually close. Investors often scrutinize insurance providers’ underwriting incomes as a means of assessing how well the provider has structured its business and how effective its underwriters are at gauging and predicting market trends. The figure is often used as a benchmark for judging business success or failure in a given period.
Insurance companies in all markets make the bulk of their money by selling policies. Policy holders pay a certain premium each month that is essentially their security against calamity. In a life insurance setting, that calamity is premature death, but policies exist for almost every loss, from houses and cars to valuable personal property and even vacation plans. The money collected in premiums forms the first half of the underwriting income equation.
Calculating underwriting income is relatively simple. First, the company must tally up how much money came in through client premiums. Any claims paid out must be deducted, along with most general operating expenses. Utility bills, staff salaries, tax obligations, and the like all fall into this category. The resulting number, if positive, is known as the underwriting income; if negative, it is called an underwriting loss.
Most insurance providers set premium amounts according to the advice of professional underwriters. An insurance underwriter assigns policy values to prospective clients based on a whole range of facts. Personal history and age are almost always considered, along with location and other more nuanced facts, like a home's age or a car's make and model. It is usually true that people with the lowest risk of placing a claim are given the most competitive premium rates, while those who seem more likely to be involved in some sort of misfortune often have to pay much more. A lot of this is to protect the insurance company’s bottom line — and its underwriting income in particular.
It is usually in the best interest of the insurance company to retain clients who are unlikely to make claims. Should something happen that has been insured against — a car accident, for instance, or a house fire — policy holders are usually able to place a claim asking the insurance company to pay damages. If there are no calamities, the insurance company simply gets to keep all money paid in.
Underwriting is usually assessed on an annual basis. Most insurance policies are issued year-to-year, so annual reviews are often able to give the best snapshot of overall fiscal standing. Some companies do internal audits of income standing mid-year, however, just to get a sense of what to expect. An insurance provider that realizes it is in danger of incurring an underwriting loss early enough is often able to self-correct in time to save its yearly numbers.
It is not always possible to project underwriting income in advance. Natural disasters like earthquakes, floods, and hurricanes often lead to numerous casualty insurance and home insurance claims all at once. It can also be the case that a number of generally “safe” clients make claims in given year, when none of them has before. Insurance largely revolves around risk, and underwriting income follows suit. An underwriting loss often hurts an insurance company’s professional standing, but it is not always damning: there is always another year, and a host of new chances to better anticipate claims.