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Underwriting profit

Underwriting Profit

Underwriting profit refers to the profit that an insurance company earns from its underwriting activities, which involves evaluating, pricing, and assuming the risk of policies. It is the difference between the premiums collected from policyholders and the claims paid out, after accounting for administrative expenses. If the premiums exceed the claims and costs, the insurer earns an underwriting profit; if claims and expenses exceed the premiums, it results in an underwriting loss.

Example

An insurance company collects $10 million in premiums but only pays out $7 million in claims and $1.5 million in administrative costs, resulting in an underwriting profit of $1.5 million.

Key points

• The profit an insurance company earns from its core business of underwriting policies.

• Calculated as the difference between premiums collected and claims/administrative expenses.

• A key indicator of an insurance company’s financial health.

Quick Answers to Curious Questions

How does an insurance company generate underwriting profit?

By collecting more in premiums than it pays out in claims and operating expenses.

What happens if claims exceed premiums in underwriting?

The company incurs an underwriting loss, indicating that it paid out more in claims than it earned in premiums.

Why is underwriting profit important for insurance companies?

It reflects the efficiency and profitability of the insurer’s core business and contributes to the company’s overall financial performance.

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