Investor's wiki

Premium to Surplus Ratio

Premium to Surplus Ratio

Premium to surplus ratio is net premiums written partitioned by policyholder surplus. Policyholder surplus is the difference between an insurance company's assets and its liabilities. The premium to surplus ratio is utilized to measure the capacity of an insurance company to guarantee new policies.

Breaking Down Premium to Surplus Ratio

Investigators might see two arrangements of the premium to surplus ratio: gross and net. A company with gross written premiums of $2.1 billion, net written premiums of $1.5 billion and a policyholders' surplus of $900 million will have a gross premium to surplus ratio of 233% ($2.1 billion/$900 million) and a net premium to surplus ratio of 167% ($1.5 billion/$900 million).

The greater the policyholder surplus, the greater assets are compared to liabilities. In insurance speech, liabilities are the benefits that the insurer owes its policyholders. The insurer can increase the gap among assets and liabilities by really dealing with the risks associated with underwriting new policies, by lessening losses from claims, and by investing its premiums to accomplish a return while keeping up with liquidity.

The gap among assets and liabilities addresses an opportunity for insurance companies. However long the insurer has a bigger number of assets than liabilities, guaranteeing new policies will be able. While each new policy increases the insurer's overall liabilities, it likewise increases the amount of premiums the insurer will receive from policyholders.

Why Premium to Surplus Ratio is Important

Premiums are the soul of an insurance company. The more premiums are paid, the more sustainable an insurance company is. Be that as it may, premiums aren't naturally viewed as income on a balance sheet. Some of it is reserved for the payment of benefits and claims. Premiums are even assigned as liabilities on the off chance that they have not yet been earned and can in any case be transformed into payments for claims. At the point when it makes money from premiums and investments, the return can be viewed as money for new underwriting activities or the giving of new policies.

By and large, a low premium to surplus ratio is viewed as an indication of financial strength in light of the fact that the insurer is hypothetically utilizing its capacity to compose more policies. Be that as it may, a low ratio may likewise emerge when an insurer isn't charging enough premiums for its policies. A higher premium to surplus ratio shows that the insurer has lower capacity. When premiums increase without a relating increase in policyholders' surplus, the capacity of the insurer to compose new policies is decreasing.