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Underwriting Profit in Insurance: What It Is and How it Works

July 16th, 2024

4 min read

By Warren Cleveland

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Understanding insurance is already complicated with all the jargon that most people don’t immediately pick up on. While you, as a business owner, likely fully understand the word “profit,” underwriting profit might be a little more confusing, especially in the realm of insurance. 

At ReNu Insurance Group, it’s our job to understand insurance lingo and how the industry works. Whether a business is part of the traditional or captive markets, we know how these companies make their underwriting profit. We’ve helped over 130 business owners become captive owners, enhanced their safety and risk management programs, and seen them earn their underwriting profit.

In this article, you will understand what underwriting profit is, how it works with traditional and captive insurers, what affects it, and how to maximize underwriting profit while with a captive insurer. That way, you can see if your business would be suitable for a captive and make underwriting profit. 

What is Underwriting profit?

Underwriting profit is an insurance carrier's profit after covering claims and operational costs. This indicates the insurer’s financial health and efficiency in managing risk. 

It is the money that remains after an insurance company has collected premiums, paid out claims, and covered its operating expenses. 

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Typically, for every dollar paid in your insurance premiums, around 65 cents will be set aside to pay future claims. The remaining 35 cents covers the insurance company’s operating expenses like salaries, rent, and other administrative costs. This profit is used to:

  • Reinvest in the business – You can enhance the services your business offers, improve risk management techniques, and expand offerings. 
  • Provide financial stability – Your underwriting profit can be used to ensure your business can pay future claims. Every business experiences a bad claims year once every five or six years.
  • Reward Stakeholders – While waiting to use the money to pay claims, it's being invested along the way. It's nothing crazy, and 100% of the investment options are U.S. government bonds, Certificates of Deposit, etc., that are strategically maturing based on actuarial projections on claims payouts.

Underwriting Profit in Traditional vs Captive Insurance

In the traditional market, businesses don’t see a nickel. The profit goes fully to the insurance company since they take on all the risk. With captives, the underwriting profit can benefit business owners who are focused on safety and risk management. 

Traditional insurance

While the policyholder takes on premiums, the insurance company takes on the risk and is responsible for paying claims. Because of this, policyholders won’t see any direct benefit from underwriting profit. The insurance company uses the profit to cover costs and generate a return to shareholders.

Because the carrier assumes all of the risk, the insured doesn’t have to worry about managing their risk as much as when part of a captive. Assuming the loss is covered, you’re transferring 100% of that risk to the insurance company without additional risk to the business owner. Some businesses prefer this arrangement versus taking on more risk for a “better deal.”

Captive insurance

With captive insurance, businesses can create their own insurance company to cover their risks. This can be done with multiple captive structures such as single-parent, group, or cell captives. For either structure, the underwriting profit is generated for business owners with safety and risk management.

Businesses will see advantages such as:

  • Cost Savings – Businesses can reduce their insurance costs by retaining underwriting profit that would otherwise go to a traditional insurer. 
  • Risk Control – Captives have more control over their risk management practices, which can lead to fewer claims and higher underwriting profits.

  • Transparency – A business will see every cent of where their premium goes and how profits are generated.

For example, in a single-parent captive, the business retains all underwriting profit after claims and expenses (assuming there was a good claims year). With a group captive, profits are shared among its members. And each business benefits from better risk management and lower costs

You might wonder if you can retain underwriting profit while with a captive insurer. Use our pricing calculator to see if they are worth the investment.

What factors affect underwriting profit?

Businesses can see four factors that affect their underwriting profit:

    1. Claims Frequency and Severity – Fewer claims or lower-cost claims increase underwriting profit. This is why businesses thrive in captives when they have effective safety and risk management programs.

    2. Operational Efficiency – Controlling operational expenses through efficient management practices helps increase profits. 

    3. Premium Pricing – Setting appropriate premium levels to cover expected claims expenses. This puts pressure on the insured because if they have many claims, the business owner will face assessments or cause risk sharing.

    4. Investment Income – Although not part of underwriting profit, investment income from reserves can help a business maintain financial stability.

How businesses maximize underwriting profit in a captive

Here are the steps to take when maximizing underwriting profit in a captive:

  • Invest in Risk Management – Businesses that have robust safety and risk management programs see a reduction in the frequency and severity of claims.
  • Monitor Claims – Reviewing and managing claims ensures quick and fair settlements while minimizing costs. 

  • Operational Efficiency – Streamline operations to reduce administrative costs and operational expenses.

Captives are not suitable for every business. That said, they are an alternative to consider if you want to retain underwriting profits and gain control over insurance costs.

Misconceptions about underwriting profit

There are a few misconceptions about underwriting profit:

  • Immediate Payouts – There’s no way around this: funds must be held in reserve to cover any future claims that might arise. Many businesses believe underwriting profit is available at the end of the policy year. In reality, profits are distributed after all liabilities are settled, often several years later. 
  • Guaranteed Profit – Underwriting profit is not guaranteed. It depends on a business’s risk management profile, premium pricing, and control over operating expenses. 

  • Profit Distribution – When part of a group captive, profits are shared among its members. Not every business receives the same amount. Distribution depends on the overall performance of the captive and individual contributions. 

Are captives right for your business?

Now that you better understand underwriting profit, you know why it is crucial for an insurance company’s ability to manage risk and operate efficiently. For those businesses involved in captive insurance, understanding and maximizing control over safety and risk management has led them to significant cost savings and maximize underwriting profit. 

Next, read our article about the best way for a business to prepare for the captive underwriting process. That way, you can understand how the auditing of risk management programs works. 

You might wonder if your business is a good fit for a captive. Take your assessment to see how your business could benefit under a captive insurer.

Warren Cleveland

Warren, the president and founder of ReNu Insurance, shifted from being a commercial pilot to the insurance industry after 9/11. He applied his aviation safety and risk management skills to insurance, creating ReNu's captive insurance model. This approach cuts costs and turns insurance into a strategic asset. An authority in captive insurance with advanced certifications, Warren drives innovative risk management solutions. Under his leadership, ReNu Insurance sets new standards, offering practical and financially smart risk management. Warren Cleveland, ACI, CIC, AAI