Analyzing the relationship of different items that appear on the insurer financial statements helps determine how well insurance companies are performing. Comparing two items produces a ratio that highlights a particular aspect of financial performance. Several such ratios are widely used in the insurance business. These ratios are broadly known as Profitability Ratio.
Profitability Ratio
Several ratios measure the profitability of an insurance company. These profitability ratios are as follows: -
· Loss Ratio
· Expense Ratio
· Combined Ratio
· Investment Income Ratio
· Overall operating Ratio
Loss Ratio is calculated by dividing an insurer’s incurred losses (including loss expenses) for a given period of time by its earned premium for the same period.
Expense Ratio is calculated by dividing an insurer’s incurred underwriting expenses for a given period by its written premiums for the same period.
Combined Ratio is the sum of loss ratio and expense ratio.
Investment Income Ratio is calculated by dividing net investment income by earned premiums for a particular period.
Overall Operating Ratio is calculated by subtracting the invest income ratio from the combined ratio.
Capacity Ratio or Premium to Surplus Ratio is calculated by dividing its written premiums by its policyholder surplus.
How Is the Financial Performance of Insurers Measured
