Adjusted Underwriting Profit

What Is Adjusted Underwriting Profit?

Adjusted underwriting profit is the profit that an insurance company earns after paying out insurance claims and expenses. Insurance companies earn revenue by underwriting new insurance policies and earning income on their financial investments. Subtracted from this revenue are expenses associated with running the business and payments on any claims that are made by insurance policyholders. The remainder is the adjusted underwriting profit. This term is specific to the insurance industry. 

Understanding Adjusted Underwriting Profit

The adjusted underwriting profit is a measure of success for an insurance company. It is important for an insurance company to successfully manage their financial investments so they can pay out on the insurance policies they have sold. If they practice prudent underwriting procedures and responsible asset-liability management (ALM), they should be able to generate a gain. If they underwrite policies they shouldn't or fail to match their assets to their future insurance policy liabilities, they will not be as profitable.

Asset-liability management is the process of managing assets and cash flows to meet company obligations, which reduces the firm’s risk of loss due to not paying a liability on time. If assets and liabilities are handled properly, the business can increase profits. The concept of asset-liability management focuses on the timing of cash because company managers need to know when liabilities must be paid. It is also concerned with the availability of assets to pay the liabilities, and when the assets or earnings can be converted into cash.

Life vs. Non-Life Insurance

There are two types of insurance companies: life and non-life. Life insurers must often meet a known liability with unknown timing in the form of a payout in one lump sum. Life insurers also offer annuities that may be life or non-life contingent, guaranteed rate accounts (GICs), or stable value funds.

With annuities, liability requirements are the funding income obligations for the duration of the annuity. On the other hand, GICs and stable value products are subject to interest rate risk, which can erode surplus and cause assets and liabilities to be mismatched. Liabilities of life insurers tend to be longer duration. Accordingly, longer duration and inflation-protected assets are selected to match those of the liability (longer maturity bonds and real estate, equity, and venture capital), although product lines and their requirements vary.

Non-life insurers, which are also known as property and casualty, have to meet liabilities (accident claims) of a much shorter duration due to the typical three to five-year underwriting cycle, which tends to drive the company’s need for liquidity. For that reason, interest rate risk for a non-life insurance company is typically less of a consideration than for a life company. However, the liability structure will vary by company, as it is a function of its product line and the claims and settlement process.