Term
Capacity Ratio #1:
Net Premiums Written to Surplus 

Definition
Net Premiums Written
Surplus
Ideal Range: <2 (NAIC considers >=3 troublesome)
Primarily Reflects: Underwriting Risk
Problems: Does NOT consider actual coverage insured
Does NOT differentiate business w/ deductibles or coins. 


Term
Capacity Ratio #2
Reserves to Surplus 

Definition
Loss Reserves + LAE + UPR
Surplus
Measures: Leverage
i.e.  Ratio=1.39 > $1.39 debt for each $1 surplus
High ratio > High sensitivity to reserving errors
No benchmark
Longtail liability losses sit in reserves for a long time
...inflate reserves vs surplus 


Term
Capacity Ratio #3
Loss Reserves to Surplus 

Definition
Loss Reserves
Surplus
Benchmark (Property): 0.5 < LR/S < 1.0
Benchmark (Liability): 2 < LR/S < 3 


Term
Capacity Ratio #4
Net Liabilities to Surplus
a.k.a. "Debt to Equity (GAAP)" 

Definition
Total Liabilities
Surplus
Includes ALL unpaid obligations (including borrowed money, dvidends declared but unpaid, etc.) 


Term
Capacity Ratio #5
Gross Leverage Ratio 

Definition
Net Liabilities + NPW + Ceded Reins. Prem.
Surplus Surplus Surplus
Exposure to Subject to Risk of Collecting
ALL unpaid Liab. Pricing Err. Vol. Reins. Payments
Net Leverage Ratio + Ceded Reinsurance Ratio 


Term
Liquidity Ratio #1
Liquidity Ratio 

Definition
Liquid Investments
(UPR + Loss & LAE Reserves)
Liquid Investments: stocks, bonds, cash, shortterm investments (mutual funds), interest due on bonds
Poor liquidity exposes the insurer to investment losses if assets must be sold below market value 


Term
Liquidity Ratio #2
Quick Liquidity Ratio 

Definition
Quick Assets
Net Liabilities
Quick Assets: Cash, shortterm inv. (mutual funds), bonds mat. w/in 1 year, Gov't bond mat. w/in 5 years, 80% value of common stocks
Net Liabilities: ALL unpaid obligations 


Term
Liquidity Ratio #3
Overall Liquidity Ratio 

Definition
Total Assets
Total Liabilities
Affected by:
 quality & marketability of premium balances
 investments in affiliates,
 other assets that are not invested



Term
Profitability Ratio #1
Combined Ratio 

Definition
Loss Ratio + Expense Ratio
(Losses + LAE "Inc.") + Expenses
Prem. Earned Prem. Written
Measures: Underwriting Income
Combined Ratio < 1 = Underwriting Profit 


Term
Profitability Ratio #2
Overall Operating Ratio 

Definition
Combined Ratio  Net Investment Income Ratio
Combined Ratio  Net Investment Income
Premiums Earned
Measures: pretax operating profits
Excludes: capital gains (losses), income taxes, other exp.
Includes: interest income, dividends, others 


Term
Profitability Ratio #3
Investment Yield Ratio
a.k.a. "Return on Investment" 

Definition
Investment Returns
Invested Assets
Measures: investment returns relative to invested assets
"How well the firm has done w/ investing"
Includes: realized capital gains (losses) 


Term
Profitability Ratio #4
Return on Policyholder Surplus
a.k.a. "Return on Equity" 

Definition
Net Income
Surplus
Measures: aftertax income relative to insurer's net resources (surplus) 


Term
Other Ratios #1
Change in Writings Ratio 

Definition
(NPWt  NPWt1)
NPWt1
Measures: % change in NPW for insurer from one period to the next
 some growth is a good sign  excessive growth may mean insurer has relaxed u/w standards or has  inadequate pricing
 volatility/wide variation in NPW growth may indicate unstable insurer
 Sudden drop may mean insurer has withdrawn from line of biz or facing serious competition



Term
Other Ratios #2
Surplus Aid to Policyholders Ratio 

Definition
Surplus aid: commissions on reinsurance ceded to nonaffiliated reinsurers.
Benchmark: should be BELOW 15%
High ratio: Insurer is u/w more business than it can support with its surplus
 Concern about reinsurer quality
 Threat to solvency if reinsurance arrangements cancelled or unable to pay its portion of claims 


Term
Other Ratios #2
Gross Change in Policyholders' Surplus Ratio 

Definition


Term
Other Ratios #4
OneYear Reserve Development to
Policyholders' Surplus Ratio 

Definition

