Gross Leverage
What Does Gross Leverage Mean?
Gross leverage is the sum of an insurance company’s net leverage and ceded reinsurance leverage ratio. Underwriters and other insurance professionals use this ratio to assess the company’s level of exposure to estimation and pricing errors, as well as to reinsurance companies.
Insuranceopedia Explains Gross Leverage
In financial terms, leverage refers to a technique used to magnify gains and losses, often through the use of borrowed funds to purchase large volumes of an asset. The expectation is that the income generated from the asset or an increase in its value will exceed the cost of borrowing.
Insurance companies typically focus on two primary objectives: limiting their risk from the policies they underwrite and generating profits by investing the premiums. To mitigate risk, insurers may cede premiums to reinsurance companies, transferring some of their risks. The second goal involves using the premiums to earn returns.
In this context, gross leverage represents a leverage ratio that combines the net premiums written ratio, the net liability ratio, and the ceded reinsurance ratio. Typically, the ideal gross leverage ratio is below 5.0 for property insurers and below 7.0 for liability insurers. Since the gross leverage ratio includes ceded reinsurance leverage, it is higher than the insurer’s net leverage.
Insurance companies list their financial ratios on their balance sheets, which are analyzed by rating agencies to assess the company’s financial health. These agencies compare the values of an insurer to those of similar companies and the industry as a whole.
