Underwriting profit is the net profit an insurance company earns from its core insurance operations, calculated by subtracting paid claims and operating expenses from collected premiums, without including any investment income.
Underwriting profit represents the fundamental profitability of an insurance company’s primary business activities. It measures how effectively an insurer evaluates risks, prices policies, and manages claims.
When an insurance company collects more in premiums than it pays out in claims and spends on operational expenses, it achieves an underwriting profit. This metric is crucial because it isolates the performance of the insurer’s core risk management function from other revenue sources like investment returns.
For business insurance providers, underwriting profit demonstrates the sustainability of their insurance operations. A consistent underwriting profit indicates that the company has accurately assessed risks and priced its policies appropriately. Insurance companies that maintain positive underwriting results typically offer more stable coverage options and pricing for their business clients.
Conversely, insurers that regularly experience underwriting losses may need to increase premiums, tighten underwriting standards, or withdraw from certain markets.
In practice, insurance companies calculate underwriting profit by taking the total premiums earned during a specific period and subtracting both the claims paid and the operational expenses incurred. The resulting figure can be expressed as a dollar amount or as a ratio.
The insurance industry often uses the combined ratio (losses plus expenses divided by earned premiums) to measure underwriting performance, with a combined ratio below 100% indicating an underwriting profit.
Why Do Underwriting Profits Matter?
For business owners, understanding underwriting profit matters because it affects the availability and cost of insurance coverage.
Insurers with strong underwriting profits tend to offer more competitive rates and broader coverage options.
Companies with sustainable underwriting results are typically more financially stable, reducing the risk that they might become insolvent and unable to pay claims.
This can be demonstrated in the following case studies.
Underwriting Profit Examples
Retail Business Property Insurance
Consider a small commercial property insurer specializing in coverage for retail businesses. This insurer collected $10 million in premiums from retail store policies during 2024.
Throughout the year, the company paid $5.5 million in claims for property damage, theft, and liability issues. It also spent $3.5 million on operational expenses, including underwriting salaries, agent commissions, and administrative costs.
By subtracting both claims ($5.5 million) and expenses ($3.5 million) from the premiums ($10 million), the insurer achieved an underwriting profit of $1 million. This translates to a combined ratio of 90%, indicating efficient underwriting practices.
For the retail business owners insured by this company, this positive underwriting performance likely means stable premiums and continued availability of coverage for their stores.
Manufacturing Workers’ Compensation Insurance
Now imagine a workers’ compensation insurance provider serving small manufacturing businesses. In 2023, the insurer collected $20 million in premiums from manufacturing clients. However, several large claims from workplace accidents resulted in total claim payments of $17 million.
The company’s operational expenses for the year totaled $4 million. When subtracting claims ($17 million) and expenses ($4 million) from premiums ($20 million), the insurer experienced an underwriting loss of $1 million, with a combined ratio of 105%.
As a result, the manufacturing businesses insured by this company faced premium increases of 15% at renewal.
Those with better-than-average safety records sought coverage elsewhere, while businesses with poor safety histories had limited options.
This example demonstrates how underwriting losses can directly impact small business owners through higher costs and reduced market options. See more on this at: Multiple factors increasing commercial insurance costs
Positives and Negatives of Underwriting Profits
The pursuit of underwriting profit brings several important benefits to the insurance ecosystem.
Insurers with consistent underwriting profits maintain greater financial stability, ensuring they can meet their obligations to policyholders even during periods of investment market volatility.
These companies can often offer more competitive pricing and innovative coverage options to businesses. Positive underwriting results also typically coincide with prudent risk selection and effective claims management, creating a virtuous cycle that benefits both insurers and their customers.
From a broader industry perspective, sustainable underwriting profits contribute to a healthy, competitive insurance marketplace with multiple carriers serving various business segments.
On the other hand, achieving and maintaining underwriting profit presents challenges. Insurance companies face intense competitive pressure that can lead to underpricing policies to gain market share.
Catastrophic events like hurricanes, wildfires, or severe convective storms can cause substantial losses that overwhelm even prudent underwriting practices.
Social inflation, i.e. the rising costs of insurance claims due to factors like increasing litigation, larger jury awards, and broader contract interpretations, also threatens underwriting profitability, particularly in liability insurance lines.
For small and medium businesses, this can result as hardening markets with higher premiums, stricter underwriting, and limited coverage options.
Did You Know?
While the property and casualty insurance industry in the United States posted a $22.9 billion underwriting profit in 2024, this actually marked the first underwriting profit since 2020.
Many insurance companies deliberately operate at an underwriting loss (known as “cash flow underwriting“) because they can more than offset these losses with investment income earned from premium dollars.
This strategy works well during periods of high interest rates but can create industry instability when investment returns decline. The recent return to underwriting profit in 2024 represents a significant shift in industry fundamentals after several challenging years.
Sources and further reading
Underwriting profit – IRMI
What is an Underwriting Profit? – Definition from Insuranceopedia
US Property-Casualty Industry Posts $22.9 Billion Underwriting Profit
Underwriting profit – Wikipedia
Key Term – Underwriting Income – Aurora Training Advantage
How Do Insurance Companies Make Money? Business Model – Investopedia
The future of underwriting in commercial P&C insurance | McKinsey
US P&C insurance industry on track for profits in 2024, says Swiss Re
Utilizing A New Underwriting Approach to Win in the Small Business – Guidewire
SMB vs. Enterprise Insurance: Why It Matters
North America Insight: Digital Disruption in Small Business Insurance
Drive Opportunity Small And Medium-Size Business Insurance