DEFINITION of 'Cash Flow Underwriting'
A pricing tool used by insurance companies. Cash flow underwriting occurs when a given insurance product is priced below the rate of premium required to take into account the cost of expected losses that will be incurred. The purpose of this strategy is to generate substantial investment capital from the increased business that will come from the lower pricing.
BREAKING DOWN 'Cash Flow Underwriting'
The investment capital that is presumably generated by the sales from the lower-priced product can be used to invest in vehicles that will pay higher rates of return. If a smaller amount were invested, then a less advantageous investment may have to be used instead. Ultimately, the higher investment returns make up for the difference in pricing for the insurer.