Premium to surplus ratio is net premiums written divided by policyholder surplus. Policyholder surplus is the difference bet🏅ween an insurance company’s assets and its liabilities. The premium to surplus ratio is used to measure the capacity of an insurance company to underwrite new policies.

Breaking Down Premium to Surplus Ratio

Analysts may look at two formats of the premium to surplus ratio: gross and net. A company with gross 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:net premium to surplus rꦺatio of🉐 167% ($1.5 billion / $900 million).

The greater the policyholder surplus, the greater assets are compared to liabilities. In insurance parlance, 澳洲幸运5官方开奖结果体彩网:liabilities are the benefits that the insurer owes its policyholders. The insurer can increase the gap between assets and liabilities by effectively managing the risks associated with 澳洲幸运5官方开奖结果体彩网:underwriting new policies, by reducing losses from claims, and by investing its premiums to achieve a return while maintaining liquᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚidity.

The gap between assets and liabilities represents an opportunity for insurance companies. As long as the insurer has more assets than liabilities,🌃 it will be able to underwrite new policies. While each new policy increases the insurer’s overall liabilities, it also increases the amount of premiums the insurer will receive from policyholders.

Why Premium to Surplus Ratio is Important

Premiums are the lifeblood of an insurance company. The more premiums are paid, the more sustainable an insurance company is. However, premiums aren't automatically considered income on a balance sheet. Some of it is earmarked for the payment of benefits and claims. Premiums are even assigned as liabilities if they have not yet been earned and can still be turned into payments for claims. When it turns a profit from premiums and investments, the return can be considered money for new underwriting activities or the issuing of new policies.

In general, a low premium to surplus ratio is considered a sign of financial strength because the insurer is theoretically using its capacity to write more policies. However, a low ratio may also arise when an insurer is not charging enough premiums for its policies. A higher premium to surplus ratio indicates that the insurer has lower capacity. When 🔜premiums increase without a corresponding increase in policyholders’ surplus, the capacity of the insurer to write new policies is decreasing.