What Does Return on Policyholder Surplus Mean?
Return on policyholder surplus refers to the calculation made when the income of the insurance company after it paid its taxes is divided by its assets which value has been computed after deducting liabilities. It is expressed in percentage form. It is also an indicator of a company's financial stature.
Insuranceopedia Explains Return on Policyholder Surplus
The fate of an insurance company is not just contingent on the payments made by its policyholders. For one, those payments do not readily translate into income. Most of these are meant to pay for coverage. Only when an insurance contract has lapsed and all the payments have been paid can a company actually generate profitable income.
Yet these payments are not just idly set aside. They are often invested, too. Investments might yield interests and strengthen the financial profile of an insurance company but the stock market has not always been consistent.
Then there is also the possibility that a large number of people make claims all at once like in the event of a natural disaster like a typhoon, for instance. This phenomenon will likely summon risks that will be covered, challenging the finances of an insurance company.
Thus, the return of policyholder surplus rests not just on the number of premiums paid but also the number of claims made and the fate of the investments of the insurance company.