What is Underwriting Income?
Underwriting refers to the process in which a person or institution take-up financial risks of transaction, typically a insurance, loan or investments in lieu of a certain premium or fee and Underwriting income refers to the return generated by an insurer’s underwriting activity over a period of time.
It is the difference between the premium received on a policy by insurance firm and expenses incurred plus claims paid out. But, excessive claims and expenses may let to Underwriting losses. So, the underwriting income helps in determining the efficiency of the underwriting activities, the new business it is bringing and how well they manage risk. The positive underwriting written indicate that the insurance firm is in better financial place and don’t have to depend on writing riskier policies and investment income.
Understanding Underwriting Income
The insurance firm receives a premium or fees for renewing an insurance policy or for writing a new policy for a new client, which is their revenue. For the insurance firm the costs are claims made by the insurer for accident and other such events and the daily operating costs. So, like any other businesses the difference between the revenue and costs are the income, also known as underwriting income. However, the income may vary from quarter to quarter, depending on the natural and other disasters such as fire and earthquakes leading to huge losses to the insurance firm.
In the First nine month of 2005, Hurricane Katrina let the Underwriting loss of $2.8 billion in US as compared to underwriting income of $3.4 billion in 2004. the UK insurance market made a huge loss on underwriting due to one of the worst winter in 2010.
The income indicates that how well the insurance firm performed in managing large claims in such extreme events. In case the insurance firm’s income is consistently negative, they may company bring enough new business to generate more income and may also indicate that they are writing risky policies, resulting in huge claims paid out. This may also indicate that the risk analysis performed by the insurance firm on individual or business is inaccurate and it’s necessary for them to find a balance between the claims and the income as any imbalance may lead to the inability to pay out future claims or insolvency.
Difference between Underwriting income and Underwriting Cycle
The underwriting cycle is the periodic fluctuation in underwriting income of the insurance firm, but its source is not still clear. Although, the fluctuations in the investment income are mild, the underwriting income swings drive these cyclical fluctuations.
A consistent and large fall in income of an insurance firm may led to insolvency and also indicates that they are writing riskier policies, which may lead to losses or means that underlying policies are under-priced in the market.
Insurance firm with consistent underwriting income usually have stronger financial position as they don’t have to write high risk policies or don’t have to invest in riskier businesses.
Difference between Underwriting and Investment income
Underwriting income is the income generated by the insurance company for taking up the financial risk in return of the premium. It is the difference between the premium received by the insurance firm and the expenses and claims. For example an insurance company received an insurance premium of $3 billion in a year and spends $2 billion in claims and expenses. Then the underwriting income stood at $1 billion. On the other hand, investment income is the profit generated from dividends, capital gains and other investments related to the purchase and sale of the assets and securities.
The Underwriting income and investment income are important to determine the performance of the insurance company and its management. The management should not only consider overall income or profit but also the underwriting income they are generating to know how well the business is performing in its core operations.