What is 'Underwriting Expenses'

Underwriting expenses are 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.

However, underwriting expenses can be quite significant for an insurer. To attract customers, they have to advertise. They also must pay commissions to insurance agents and brokers, give their employees a salary and pay taxes and other operational expenses. Every dollar paid in underwriting expense is a dollar that doesn't flow to the insurer's bottom line, so investors naturally should look for insurers that run a tight ship.

Some insurers have low expense ratios because of economies of scale – most notably with large national advertising budgets and well-known brand names that help attract customers. Other insurers employ direct-sales techniques to cut out the insurance agents and brokers and the underwriting expenses that come with them. In the auto-insurance industry, for example, GEICO, a unit of Berkshire Hathaway and Progressive (NYSE:PGR), has contributed to its own long-term success by eliminating the middleman -- similar to how Dell's direct sales method gives it a pricing advantage over competitors.

Factors Affecting Underwriting Expenses

The price of an insurance policy is largely the function of supply and demand. When times are good, insurers make underwriting profits, and underwriting expenses and loss ratios decrease. As a result of the fewer operational expenses and favorable pricing conditions, some insurers, driven by short-term greed, increase capacity by writing more policies. This increase in supply results in decreasing prices. Eventually, the cycle turns, losses increase, and insurers who wrote a lot of policies at low prices are left in a potentially bad situation. These types of swings are extremely similar to the boom-bust cycles of the stock market.

  1. Underwriting Income

    Underwriting income is profit generated by an insurer's underwriting ...
  2. Underwriting Risk

    Underwriting risk is the risk of loss borne by an underwriter ...
  3. Insurance Underwriter

    An insurance underwriter is a professional who evaluates the ...
  4. Underwriter

    An underwriter is any entity that evaluates and assumes another ...
  5. Underwriting

    Underwriting is the acceptance of a specific transaction's risk ...
  6. Underwriting Cycle

    Underwriting cycle refers to fluctuations in the insurance business ...
Related Articles
  1. 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.
  2. Insurance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  3. Insurance

    Overcoming Life Insurance Eligibility Issues

    There are many issues that can keep you from obtaining life insurance at a reasonable rate.
  4. Investing

    The Road To Creating An IPO

    Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first ...
  5. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  6. Insurance

    Can I Get Life Insurance?

    Find out what you can do to get the coverage you need for the right price.
  7. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  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. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter and the important qualities ... Read Answer >>
  5. What is real estate underwriting?

    See how underwriters for major lenders scrutinize real estate loans and manage their risk, and learn the origin of the term ... Read Answer >>
  6. What is the expense ratio in the insurance industry?

    Learn about the expense ratio for insurance companies and the different methods of calculating it. Read Answer >>
Hot Definitions
  1. Perfect Competition

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

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

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. 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 ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center