Premium To Surplus Ratio

What Does Premium To Surplus Ratio Mean?

The premium to surplus ratio indicates how many new policies an insurance company can underwrite based on the difference between its assets and liabilities. This ratio reflects the company’s financial liquidity and is expressed as a percentage.

Regulators and rating agencies watch this ratio when evaluating an insurer’s ability to pay claims, which is why it’s a common factor in rankings of the top life insurance companies.

Insuranceopedia Explains Premium To Surplus Ratio

Premiums are essential to the sustainability of an insurance company; the more premiums collected, the better the company can operate. However, premiums are not automatically classified as income on the balance sheet. A portion of premiums is allocated for the payment of benefits and claims. Additionally, any unearned premiums are recorded as liabilities, meaning they can still be used for future claims.

When the company generates a profit from premiums and investments, that profit can be utilized for new underwriting activities or the issuance of new policies.

The same logic applies in auto insurance, where carriers ranked among the top car insurance companies tend to keep their premium-to-surplus ratios conservative so they can pay out claims after a heavy loss year.