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

You might be wondering how underwriting profit works in captive insurance compared to the traditional market. One of the biggest missed opportunities for independent agents in these conversations is underwriting profit and how it benefits their clients. Not knowing of this can lead to your clients not truly seeing the potential of them benefitting in captives–and giving opportunity for someone else to swoop in and help them.

Agents who stick to traditional insurance models are leaving money on the table for their clients. Money that could be used to reduce costs, improve risk management, and even generate returns.

By the end of this article, you’ll understand what underwriting profit is, how it works in both traditional and captive insurance models, and how you can use this knowledge to help your clients better. You’ll also learn why educating your clients about underwriting profit can strengthen your relationship with your clients and grow your book of business.

What is Underwriting Profit?

Underwriting profit is the money left over after an insurance company collects premiums, pays claims, and covers operational expenses. It’s the real measure of whether an insurance company manages risk effectively. 

For every dollar a client pays in premiums, around 65 cents is typically set aside for future claims. The remaining 35 cents cover administrative costs. Whatever is left after those expenses is underwriting profit.

It works the same in both the traditional and captive markets. The main difference is who gets to keep the underwriting profit.

What happens to underwriting profit?

• In traditional insurance, it goes straight to the carrier’s bottom line.
• In a captive model, underwriting profit can go back to the business owners if they effectively manage risk.

Traditional Insurance: Who Really Profits?

In the traditional model, insurance carriers take on 100% of the risk and, in return, keep 100% of the underwriting profit. Business owners pay premiums, file claims when needed, and hope for the best.

While this system provides stability, it offers zero transparency or financial benefit to businesses that maintain strong risk management programs.

Captive Insurance: Underwriting Profit as a Business Asset

Captive insurance flips the script. Instead of giving underwriting profit to a traditional insurer, businesses that form a captive have the potential to keep and reinvest that money.

The benefits of underwriting profit in captives:

• Cost Savings: Businesses retain more of their premium dollars.
• Risk Control: The better they manage risk, the more underwriting profit they keep.
• Transparency: Clients see exactly where their insurance dollars go.

Clients who are good candidates for captives—those with strong safety programs and low claims—are throwing money away in the traditional market. Captive participation allows them to turn their insurance costs into a financial asset.

What Factors Affect Underwriting Profit?

Four key elements determine whether a business will generate underwriting profit inside a captive:

1. Claims Frequency and Severity: Fewer and lower-cost claims increase underwriting profit.
2. Operational Efficiency: Reducing overhead and administrative waste boosts profitability.
3. Premium Pricing: If premiums are set too low, underwriting profit shrinks.
4. Investment Income: While not directly part of underwriting profit, captives often invest reserves in low-risk assets.

Clients who struggle with risk management might not be ideal captive candidates, while those with strong controls in place can maximize their financial benefits.

How to Help Clients Maximize Underwriting Profit in a Captive

Here’s how you can help advise your clients to succeed in a captive structure:

1. Encourage Risk Management Investments: The best captive candidates are proactive about workplace safety and loss prevention.
2. Promote Claims Oversight: Captives give business owners more control over claims handling, ensuring fair settlements and cost reductions.
3. Advise on Cost Efficiency: Help clients streamline operations to keep administrative costs low.

The better your clients manage risk, the more underwriting profit they retain and the more they’ll appreciate your expertise.

Addressing Misconceptions on Underwriting Profit in Captives

When it comes to underwriting profit in captives, there are many misconceptions that are misunderstood. Here are some misconceptions and the truths behind them:

Misconception #1: "Underwriting profit means immediate payouts."

• Reality: Underwriting profit isn’t instantly available. It’s held in reserve to cover claims and is distributed once all liabilities are settled.

Misconception #2: "Underwriting profit is guaranteed."

• Reality: There are no guarantees. A business with high claims won’t generate profit.

Misconception #3: "Every captive member gets the same profit distribution."

• Reality: In group captives, distributions depend on each member’s loss performance. The best-managed businesses earn the most.

As an agent, clearing up these misconceptions will help you build trust and credibility with clients.

Why Independent Agents Need to Talk About Underwriting Profit

If you’re not educating your clients on underwriting profit, someone else will. Businesses that are frustrated with rising premiums and lack of control are actively looking for alternatives. You want to understand captives and underwriting profit to stay ahead of the competition.

Up next, read our article on how captive insurance can help your clients with cash flow. That way, you can help educate them on how captives can better their business. 

Captive Coalition understands all things captive insurance, including how underwriting profit works and how your best clients earn it over time. In a competitive market, we want independent agents to keep themselves educated to retain their best clients and maintain their book of business. 

To learn more about captive insurance, become a member of Captive Coalition for FREE to access additional tools, resources, webinars, and training to strengthen your book of business and help your best clients.