What is an underwriting profit and why should it matter to anyone other than us?
Simply, an underwriting profit is achieved when the sum total of the claim payments (including reserves for claims pending as well as estimates for claims incurred but not yet known to us), claim adjusting expenses, acquisition costs (like broker commissions), underwriting and policy service expenses, and company overhead expenses (like rent, human resources, finance, marketing, and executive) is less than the premium received from our insureds before any consideration for investment income.
As underwriters, we believe that underwriting profit is the best measure of whether we are doing a good job of selecting and pricing the risks that we assume under the insurance policies written for our insureds.
At James River, we have earned an underwriting profit every single year since our founding in 2003.
Why is that important to our clients? There are three reasons:
- Proficiency. If you are good at what you do, your proficiency is demonstrated by your results. In our business, the result of solid risk selection, pricing, and claims handling is demonstrated by earning an underwriting profit.
- Consistency. Are you good or are you just lucky? If you are consistent, you deliver solid results year after year regardless of the "market cycle".
- Security. Essentially, an insured is buying a promise from an insurance company. That promise is backed up by the quality of the company's balance sheet. If the company is profitable, it is strengthening its balance sheet. If it is not profitable, then it is eroding its capital base and threatening its ability to meet its promises.
Why not consider investment income?
Insurance companies make money by both underwriting income and investment income, so investment income is very important. However, investment income is not steady and cannot be relied on to cover for underwriting losses. Statutory requirements and prudence require that insurance companies invest conservatively and in "near cash" instruments. Investment results move independently from underwriting results and many companies have come to ruin by "cash-flow" underwriting: chasing policy premium just to invest. If a company plans to rely on investment income to cover for its underwriting mistakes, it's playing a dangerous game.
Proficiency. Consistency. Security.
At James River, we believe that the interests of our insureds and our owner/stakeholders are best served today and long-term by "An Unrelenting Focus on Underwriting Profitability"®!