“Underwriting profit” in the context of the insurance industry, including sectors like life insurance and living benefits in Canada, refers to the profit an insurance company generates from its underwriting activities, after all claims, expenses, and loss adjustment expenses have been deducted from the earned premiums. It is a key indicator of the financial health and operational efficiency of an insurance company. Since 2023, Canadian insurers report under the IFRS 17 accounting standard, where the closest measure is the insurance service result: insurance revenue less insurance service expenses, shown separately from investment results.
Underwriting profit is calculated as follows:
Underwriting profit = earned premiums - (claims paid + underwriting expenses + loss adjustment expenses)
Key components influencing underwriting profit include:
Earned premiums
The total premiums that an insurance company has earned over a period, accounting for the coverage it has provided. This does not include the premiums received for coverage that extends beyond the current accounting period.
Claims paid
The total amount the insurer has paid out to policyholders or beneficiaries for claims during the period.
Underwriting expenses
The operational costs associated with assessing, issuing, and administering insurance policies, including salaries for underwriters, marketing costs, and other administrative expenses.
Loss adjustment expenses
The costs incurred in the process of investigating, managing, and settling claims, including legal fees and adjuster salaries.
An underwriting profit occurs when the earned premiums exceed the sum of claims paid, underwriting expenses, and loss adjustment expenses. It signifies that the insurer is effectively pricing its insurance products and managing its risks, ensuring that premiums collected are sufficient to cover claims and expenses while still generating a profit.
However, it’s important to note that insurance companies also generate income from investing the premiums they collect, known as investment income. Therefore, an insurer can still be financially successful even if it does not achieve an underwriting profit, as long as its investment income offsets underwriting losses.