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What Is the Expense Ratio in the Insurance Industry?

By

澳洲幸运5官方开奖结果体彩网:Andrew Sebastian

Updated September 12, 2023

Reviewed by

Chip Stapleton

Fact checked by

Jared Ecker

The expense ratio in the insurance industry is a measure of profitability ꧅calculated by dividing the expenses associated 💃with acquiring, underwriting, and servicing premiums by the net premiums earned by the insurance company.

The expenses can include advertising, employee wages, and commissions for the sales force. The expense ratio signifies an insurance company's efficiency before factoring in policy claims and investment gains or losses.

The expense ratio is combined in practice with the loss ratio to give an insurance company's 澳洲幸运5官方开奖结果体彩网:combined ratio.

Key Takeaways

The expense ratio compares an insurance company's expenses incurred when underwriting a policy to the revenues it expects to receive from it.
Insurers may calculate the expense ratio using net premiums written that fall under either GAAP or statutory accounting best practices and guidance.
The expense ratio is a key piece of the combined ratio, which is the industry standard for measuring insurer efficiency and profitability.

Two Different Methods

There are two ways to calculate expense ratios. Insurance companies typically use 澳洲幸运5官方开奖结果体彩网:statutory accounting instead of generally accepted acc🧸ounting principles (GAAP) accounting to calculate their expense ratios, as statutory accounting yields more conservative ratios.

Although the expenses are the same in both ratios, statutory accounting uses the 澳洲幸运5官方开奖结果体彩网:net premiums written durin🍸g t💖he period in the denominator to get the expense ratio.

澳洲幸运5官方开奖结果体彩网:GAAP accounting uses the net premiums earned during the period. 澳洲幸运5官方开奖结果体彩网:Net premiums written represent the n♕ew business brought in by the company, while net premiums earned may include both new business and recurring business from existing policies.

Health Insurance and the Expense Ratio

Since the 澳洲幸运5官方开奖结果体彩网:Affordable Care Act (ACA) was passed in 2010, the so-called 80/20 Rule was enacted, which applies to health insurers. Known as the 澳洲幸运5官方开奖结果体彩网:medical loss ratio (MLR), the rule states that health insurance carriers must return 80% (or up to 85%, depending on the size of the plan) of health insurance premium income to pay for healthcare services to the policyholders.

Fast Fact

Individual states can adjust the 80% level if they prove that level might destabilize the health insurance market and result in fewer choices for consumers in that state.

A Precursor to Overall Profitability

The expense ratio can hence be used to compare companies and analyze a company's performance over time. An expense ratio under 100% signifies that the insurance company is either earning or writing more premiums than it is paying out in expenses to generate or support these premiums. Although its expense ratio can be stellar, the overall profitability of an insurance company is affected by its loss ratio, 澳洲幸运5官方开奖结果体彩网:investment income, and other gains and losses.

Thus, the expense ratio is not a measure of ending profitability. Instead, it is a precursor to finding an insurance company's overall profitability.

What Is the Expense Ratio and Loss Ratio in Insurance?

The loss ratio is the total loss amount from total collected insurance premiums. The expense ratio is the perc🍒entage of premiums a company uses to pay expenses.

What Is the General Expense Ratio?

The general expense ratio indicates the per-unit cost of managing funds. It is cal🍌culated by dividing total e🅘xpenses by total assets under management.

How Is Expense Ratio Calculated?

The expense ratio is calculated by dividing a fund's operating expenses by the average dollar value of assets under management.

The Bottom Line

The insurance expense ratio measures an insurance company's profitability by dividing the expenses of acquiring, underwriting, and servicing premiums by the net premiums earned by the insurance company.

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