What Does Gross Leverage Mean?
Gross leverage is the sum of the net leverage and ceded reinsurance leverage ratio of an insurance company. Underwriters and other insurance professionals use this ratio to determine an insurance company's level of exposure to estimation and pricing errors and reinsurance companies.
Insuranceopedia Explains Gross Leverage
In financial terms, leverage denotes a technique to multiply gains and losses. It typically involves the use of borrowed funds to purchase high volumes of an asset in the belief that the income from the asset, or an appreciation in the asset price, will surpass the cost of borrowing.
All insurance companies typically focus on two objectives. They seek to limit their risk from the policies they underwrite and sometimes do so by ceding premiums to reinsurance companies. Doing this enables the insurance companies to transfer some risks. The second goal involves investing the premiums to generate profits.
In this scenario, the gross leverage denotes a leverage ratio. It comprises the sum of the net premiums written ratio, the net liability ratio, and the ceded reinsurance ratio. Typically, the desired gross leverage ratio is below 5.0 for property insurers and below 7.0 for liability insurers. Because the gross leverage ratio includes the ceded reinsurance leverage, it is higher than the net leverage of the insurance company.
Each insurance company lists its various financial ratios in its balance sheet. Ratings agencies examine them to assess the health of the insurance company. To do so, they compare the values of a particular insurance company to that of similar insurance companies and the insurance sector as a whole.