Underwriting Expenses: What They Are, How They Work

Underwriting expenses are the costs incurred to evaluate, issue, and manage insurance policies or to underwrite securities. These expenses are a major operating cost for insurers and investment banks; keeping them low relative to revenue improves profitability.

Key takeaways

• Underwriting expenses are the costs of performing underwriting activities for insurance companies and investment banks.
• For insurers, expenses include salaries, commissions, actuarial reviews, inspections, and support functions like accounting and customer service.
• For investment banks, expenses cover due diligence, research, legal, and accounting fees related to securities underwriting (e.g., IPOs).
• The insurance expense ratio measures underwriting expenses as a portion of premiums: expense ratio = underwriting expenses / premiums.
• Claims paid on policies are not underwriting expenses; they are separate loss costs.

What underwriting expenses include

For insurance companies:
* Direct costs: underwriting salaries, commissions to agents/brokers, actuarial work, policy inspections.
* Indirect costs: marketing and advertising, accounting and legal fees, customer service, IT and administration.

For investment banks:
* Due diligence and regulatory compliance costs.
* Legal and accounting fees.
* Research, roadshow expenses, and other costs tied to underwriting securities offerings.

Expense ratio and profitability

The expense ratio shows the share of premium revenue used to cover underwriting expenses:
expense ratio = underwriting expenses ÷ premiums

A lower expense ratio generally indicates greater operating efficiency and higher potential underwriting profit, all else equal. Insurers monitor this ratio closely because higher expense ratios reduce net income from underwriting operations.

Factors that affect underwriting expenses

• Distribution channel: Using agents and brokers increases commissions; direct sales reduce intermediary costs.
• Scale and brand recognition: Large insurers can spread fixed costs over more policies and spend less per policy on marketing.
• Business maturity: New companies often face higher startup, marketing, and recruitment costs.
• Technology and process efficiency: Automation and online sales can reduce servicing and acquisition costs.

Example: Direct-to-consumer insurers that sell online or via call centers often lower distribution and acquisition costs compared with insurers that rely heavily on brokers.

What underwriting expenses do not include

Underwriting expenses cover the cost of conducting underwriting business, not the losses insurers pay out. Claim payments and loss reserves are accounted for separately from underwriting expenses.

Managing underwriting expenses

Companies can improve underwriting efficiency by:
* Shifting to lower-cost distribution (direct sales, online channels).
* Investing in automation and data analytics for underwriting and customer service.
* Achieving economies of scale through growth or consolidation.
* Controlling marketing spend and commission structures.

Conclusion

Underwriting expenses are the operational costs tied to evaluating and issuing insurance or underwriting securities. Measuring and controlling these expenses—particularly through the expense ratio—helps insurers and underwriting institutions maintain profitability and competitive pricing.