Net Underwriting Income

In business, income refers to the money and other revenues acquired in the sale of products as well as services in the ordinary course of business operations. Plain income is referred to as gross income; if it is decreased by business expenses, costs, and write-offs associated with it, it is then called net income.

Example of income for a merchandising business is sales; for a dentist is dental or professional income; and for an apartment is rental income. Income in business indicates the presence or loss of money, the main fact that concerns managers, business investors, and the public in the course of the business’ life, since a decision to support, invest, or continue in a business relies on its ability to generate higher income.

Income is displayed in the company’s income statement, or statement of profit and loss, a business financial statement intended to be made for a particular period, say monthly or annually. An income statement is a corresponding statement that goes with the balance sheet, another financial statement showing the company’s financial position.

However, in insurance, income portrays all cash flow sources. It is usually stated annually in business reports.

On the other hand, there is a practice in insurance called underwriting. It is the practice of reviewing and evaluating probable insured persons or groups to assess them of possible risks in order to arrive at the exact premium. Risks are then classified according to their extent of insurability so that correct premium rates are designated. Risks that do not qualify are therefore discarded. The person who does the underwriting is labeled as an underwriter.

The underwriting practices are contained and detailed in the underwriting guide. Other names for this is underwriting guidelines, underwriting manual, or manual of underwriting policies. This provides accurate guidance for underwriters in analyzing the different kinds of applicants.

Underwriting income is 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. To illustrate, an insurance company having $5,000,000 revenues from premiums, and the cost to settle its claims is $3,000,000, its income then is $2,000,000.

Net underwriting income is composed of loss adjustment expenses, dividends for policyholders, expenses for loss-adjustment, and earned net premiums minus losses incurred.

Expenses in underwriting that are attributable to net premiums written are called underwriting expenses incurred. These include salaries, advertising costs, and net commissions.

Additionally, underwriting expense ratio represents the portion of a business’ net premium written that move towards its underwriting expenses, including brokers’ and agents’ commissions, salaries, employee benefits, municipal and state taxes, and similar costs of operations. This ratio can be computed by means of dividing the underwriting expenses by the net premiums written. Expense ratios vary according to the line of business involved. Group health insurance often have low expense ratios, while machinery insurance have high expense ratios because of its need to hire skilled inspectors.