Underwriting Expenses Incurred

Underwriting in insurance is the method used to choose the persons and objects covered in a policy. The persons/objects to be insured, the amount of insurance premiums, the sum of the coverage, and the persons/objects not accepted to be insured are the subjects accomplished in underwriting. It as well involves the assessment of risks associated in a plan. Thus, the exposures and risks of prospective clients are evaluated.

The one who does the underwriting job is labeled as the insurance underwriter. The main role of an insurance underwriter is to “write”, or acquire businesses to provide money to the insurance company. They likewise serve to secure the company from risks that are likely to result in loss. Thus, their primary job is to create the insurance policies.

In general terms, the job of an underwriter is to administer the distribution and public issuance of securities owned by an issuing body, such as a corporation. An underwriter could be any entity including a company. Establishing a security’s offering price, buying them from issuing companies, and selling them to stakeholders and investors through its distribution network, are the main responsibilities of an underwriter.

Underwriting fees are paid by issuing clients to underwriters. Aside from that, underwriters are given a profit share out of the sale of shares to various investors. The sole disadvantage in the underwriter’s task is the risk of not being able to sell all the underwritten securities. In case it’s not sold at the offering price, the underwriter has no other choice but to sell them in a lesser amount than its cost, and worse, keep the shares themselves.

Thus, in the world of insurance, an underwriter functions as the one analyzing insurance applications whether to be agreed upon or discarded. Independent brokerage firms and insurance companies or carriers are typically the ones hiring insurance underwriters. In most cases, insurance underwriters work as back-ups to insurance agents, though they are sometimes allowed to go together with agents during client sales calls.

Expenses pertaining to insurance underwriting are typically comprised of commissions, salaries, office rent, overhead expenses, guaranty association appraisals, membership fees for industry bureaus and associations, and related taxes, excluding foreign income, real estate, and federal income taxes.

Underwriting expenses incurred, on the other hand, take in expenses which can be attributed to the generation of net premiums written, either paid by the insurance company or not. These include net commissions, advertising costs, and salaries.

A ratio that stands for a percentage of the net premiums written of a company that traveled towards underwriting expenses is called the underwriting expense ratio. The formula for this ratio is:

Underwriting expense ratio = Underwriting expenses / Net premiums written

For instance, when a company obtains an underwriting expense ration of 28.1%, it means that such company pays out over 28 cents per dollar or the net premiums written in paying the costs of underwriting.

Underwriting income, on the other hand, represents the difference between earned premiums and the expenses in settling claims such as losses and paid dividends. Simply put, it is the total income generated by an insurance company. It is viewed as the revenue from premiums on the company’s various insurance policies.