Net Liabilities to Policyholders' Surplus

Published: | Updated: January 3, 2017

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Definition - What does Net Liabilities to Policyholders' Surplus mean?

Net liabilities to policyholders' surplus is an evaluative ratio that measures an insurance company's capability to meet its estimated future liabilities. Net liabilities include unearned premiums, unpaid claims, and reserve estimation errors, while policyholders' surplus refers basically to net worth. The ratio of the two indicates how well an insurance company has made provision in reserves for future claims and whether the company is already dipping into the surplus to cover losses, which should actually be paid from the loss reserves.

Insuranceopedia explains Net Liabilities to Policyholders' Surplus

The National Association of Insurance Commissioners (NAIC) considers a ratio less than 2 or 200 percent acceptable. Any ratio greater than this is indicative of possible unhealthy dipping into funds that are not loss reserves. This ratio is of interest to many financial managers and investors for its usefulness in evaluating financial stability as it can help forecast a firm's profitability.

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