How to Calculate Gross Profit of an Underwriter
Every business needs ways to measure its profitability. Profitability measurements, such as gross profit, tell the business owner how much money he earns. Underwriting businesses assume the liability for the transactions of their clients. Before completing a transaction, the client contacts the underwriter for approval. For example, underwriters often guarantee loans for financial institutions. The institution provides the underwriter with information about the transaction and the underwriter approves or rejects the transaction. Underwriters calculate their gross profit regularly to evaluate their pricing structure and their profitability. When the company sets its prices too low, the underwriter makes less money than he desires or loses money.
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Instructions
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1
Read the income statement. Locate the total revenue.
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Read the expenses listed on the income statement. Highlight each expense that relates directly to the underwriting activity, such as Estimated Underwriting Claims Expense. Add the total highlighted expenses together.
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3
Subtract the total underwriting expense from the total revenue. This equals the gross profit.
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4
Divide the gross profit by the total revenues. This equals the gross profit ratio.
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Tips & Warnings
Several financial calculations exist to calculate profitability. These include net income, operating income and gross profit. Net income considers all revenues and expenses of the business. Operating income considers only the revenues and expenses involved with the primary activities of the company. Gross profit only uses the selling price of the product and the cost of the product itself.
When considering the business success of an underwriter, you also need to evaluate the economy’s condition and the underwriter’s philosophy. When the economy experiences a downturn, underwriters need to adjust also. More consumers seek financing and create additional business opportunities for the underwriter. However, many consumers lack the resources to repay the obligation if the underwriter approves the financing. The underwriter’s philosophy determines if he approves these financing applications and the potential risk he faces.
Gross profits vary significantly between underwriters. They earn revenue through the interest rates they charge their customers. These rates vary depending on the type of company the underwriter is working with and the risk involved with lending to the consumer. Some underwriters focus their business on riskier customers and charge a higher rate. These companies earn higher revenues and a higher gross profit. Others limit their financing to consumers with high credit scores and charge a lower rate. These companies earn less revenue and report a lower gross profit.
