What is Underwriting Income?
The profit generated by an insurer's underwriting activity over time is referred to as underwriting income.
Underwriting income is the difference between premiums collected on insurance policies and expenses incurred and claims paid out by the insurer. Huge claims and disproportionate expenses may result in an underwriting loss for the insurer rather than income. It accurately measures the efficiency of an insurer’s underwriting activities.
When an insurance company writes a policy for a new client or renews a policy for an existing client, they are paid in the form of an insurance premium. This is their income. An insurance company’s costs include both normal business expenses and money paid out to customers when they file an insurance claim for an accident or other similar event. The difference between revenue and costs is the income, which in this case is the underwriting income.
With the exception of extreme events like earthquakes and hurricanes, this income is a good indicator of how well an insurance company is doing. If the underwriting income is consistently negative, it is possible that the insurance company is not bringing in enough new business (underwriting new policies) to generate additional revenue.
Conversely, it may indicate that the policies it is writing are risky, resulting in frequent claims payments. This could indicate that the risk analysis performed by an insurance company on a business or individual when underwriting a policy is inaccurate.
It is critical for an insurance company to strike a balance because if it is constantly paying out more claims than it is bringing in through underwriting revenue, it may be unable to pay out future claims or face insolvency.