Underwriting Expenses

DEFINITION of 'Underwriting Expenses'

Costs and expenditures associated with underwriting activity. Underwriting expenses include a wide range of expenditures, and the exact definition differs for insurers and investment banks. As a major expense category, the lower these expenditures are as a proportion of underwriting activity, the higher the profitability of the insurer or investment bank.

BREAKING DOWN 'Underwriting Expenses'

For an insurer, underwriting expenses may include direct costs such as business acquisition, actuarial reviews and inspections, as well as indirect costs such as commissions paid and accounting, legal and customer service expenses. For an investment bank, underwriting expenses would include such costs as due diligence activities and research, legal and accounting fees.

The expense ratio for an insurer is obtained by computing underwriting expenses as a percentage of premiums earned for a given period. Since the profitability of an insurer has an inverse correlation with the expense ratio, insurers strive to keep this ratio in check in order to remain profitable.