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.
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.
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:
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.
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.”
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:
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.
Businesses can see four factors that affect their underwriting profit:
Here are the steps to take when maximizing underwriting profit in a captive:
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.
There are a few misconceptions about underwriting profit:
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.