What is 'Underwriting Capacity'

Underwriting capacity is the maximum liability that an insurance company is willing to assume from its underwriting activities. Underwriting capacity represents an insurer’s ability to retain risk.

BREAKING DOWN 'Underwriting Capacity'

An insurance company’s potential for profitability depends on its appetite for risk. The more risk it assumes by underwriting new insurance policies, the more premiums it collects and later invests. When an insurer accepts additional hazards, through the issuance of policies, the possibility increases that it may become insolvent. A company's underwriting capacity, or the maximum amount of acceptable risk, is a crucial component of its operations. 

To protect policyholders, regulators prohibit insurance companies from underwriting an unlimited number of policies. 

Underwriting capacity represents an insurer’s ability to pay for its obligations. Insurance companies determine their underwriting capacity by evaluating many factors. Relevant factors include the insurer’s pricing strategy, the adequacy of its reserves, the types of assets held, and the volatility of its risk pool. Insurers treat the underwriting capacity as a finite number that is drawn against as new policies are underwritten, similar to a line of credit.

How Insurers Increase Underwriting Capacity

Over time, an insurer’s underwriting capacity can change based on how the factors used to calculate its capacity change. An insurance company can increase its underwriting capacity by underwriting policies that cover less volatile risks. As an example, a company may refuse to write new property insurance coverage in a hurricane-prone zone, but will still cover hazards from fire and theft. Limiting the risk of policies written reduces the likelihood that the company will have to pay out claims. 

Insurers are also able to increase underwriting capacity by ceding their obligations to a third party, as with reinsurance treaties. In a reinsurance contract, the reinsurer assumes some of an insurer’s liability in exchange for a fee or a portion of the premiums paid by the policyholder. The liabilities assumed by the reinsurer no longer count against the ceding company's underwriting capacity, which allows the insurer to underwrite new policies.

Using reinsurance does not mean that the insurer can abandon the liabilities it cedes in the reinsurance contract. The ceding company is still ultimately responsible if a claim should occur. In a situation where the reinsurer becomes insolvent, the ceding insurer must pay for claims made against its original underwritten policies. Therefore, it is critical for the insurer to know the financial health of the reinsurer, including the amount of risk that the reinsurer has agreed to take on through other reinsurance contracts.

  1. Gross Line

    The maximum amount of coverage an insurer is willing to underwrite ...
  2. Large-Line Capacity Insurance

    Large-line capacity insurance is the maximum amount of liability ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Insurance Underwriter

    An insurance underwriter is a professional who evaluates the ...
  5. Over-Line

    Insurance coverage that exceeds the amount typically offered ...
  6. Fronting Policy

    Fronting policy is a risk management technique in which an insurer ...
Related Articles
  1. Insurance

    Facultative vs. Treaty Reinsurance: Differences and Examples

    Reinsurance companies offer insurance to other insurers in case the traditional insurer does not have enough money to pay claims against its written policies.
  2. Insurance

    The Business Model of Reinsurance Companies

    Learn about the business of reinsurance, a hidden industry that underpins the entire financial and insurance structure around the globe.
  3. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  4. Insurance

    Accelerated Underwriting Makes Life Insurance Easy

    A new development called “accelerated underwriting” is making it faster and easier for people to obtain life insurance.
  5. Tech

    The Reinsurance Industry: An Inside Look (BRK.A)

    Warren Buffett has a major influence on the global reinsurance market, which has seen momentum in 2016 for higher revenue.
  6. Insurance

    Third Point Reinsurance Notes Largest Profit in Years

    Third Point Reinsurance saw a tripling of net income in the second quarter of 2016 over last year.
  7. Insurance

    The Reinsurance Industry: An Inside Look

    Low demand and high regulatory pressures may be problematic for the global reinsurance market following the shrinking margins and declining demand of the first half of 2016.
  8. Financial Advisor

    All About Impaired Risk Annuites and Insurance

    What are impaired risk insurance products and understanding life insurance rate classes, table ratings and flat extra premiums.
  9. Tech

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  1. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ... Read Answer >>
  2. What is the difference between underwriting and investment income for an insurance ...

    Learn more about insurance companies' investment and underwriting incomes. Read about how investment incomes and underwriting ... Read Answer >>
  3. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
  4. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center