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Given that the insurance sector is a particularly specialised one, we should consider a few factors that will allow us to evaluate the business’s activities more accurately. Examining a company’s main statistics is a good way to gauge an insurer’s reputation. You can use these ratios to make wise decisions.
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Key Ratios Related to Life Insurance
Here are some fundamental insurance ratios that could improve your ability to evaluate a business.
Persistency Ratio
This statistic demonstrates how steadfastly clients have renewed their insurance coverage year after year. This reveals the degree of customer loyalty and whether annual premium payments have been made. It is regarded as a measure by which one can assess if the business consistently produces high-quality goods. It is monitored at predetermined intervals, such as the 13th, 25th, 37th, and 61st months. Any business with a higher persistency ratio has managed to maintain a sizable clientele base of happy customers. The persistency ratio is computed by dividing the number of paying policyholders by the number of net active policyholders and multiplying the result by 100. A vast network of satisfied consumers and a strong persistency ratio are signs of customer satisfaction. Lack of customer loyalty is indicated by a low persistency ratio.
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Claim Settlement Ratio
One should consider it before purchasing insurance because it is one of the most important ratios. It reveals what proportion of all claims submitted by consumers has been resolved by the company. Nobody would want their insurance to be provided by a company that takes a long time to resolve claims and pay out benefits. The company will do considerably better if the claim settlement ratio is higher. The claim settlement ratio (CSR) shows the number of claims that a company has settled in comparison to the total number of claims. A higher CSR suggests that the business will be more likely to resolve the issue when it arises. The premium may be lower as well if an insurer has a low CSR. Although you might be able to save some money on the premium amount in this situation, your claim has a greater likelihood of being rejected. To make an informed choice, compare and evaluate the CSR of multiple insurers before buying any insurance. A greater CSR value is viewed as a crucial sign of an insurer’s standing because it is linked to a higher likelihood of claim settlement.
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Solvency Ratio
This ratio is crucial because it indicates if an insurance provider has enough cash on hand to pay out all claims upon liquidation. The cash flow and liabilities of a corporation are gauged by the solvency ratio. You can make better decisions if you are aware of the company’s ability to manage its short- and long-term obligations. It is a symbol of reliability. Every insurance entity must have a minimum solvency margin of 1.5 or 150 per cent, according to the Insurance Regulatory and Development Authority (IRDA). This is to prevent the circumstance leading to bankruptcy. An insured person feels more confident since higher solvency ratios show a greater ability to pay insurance claims in uncertain circumstances. On the other hand, a low solvency ratio indicates that the corporation struggles to handle its debt commitments and missed payments.
Loss Ratio
A company’s loss for a specific year is measured by its loss ratio. It displays the total claims paid out as a percentage of the total premiums collected during that year. An escalating loss ratio indicates that the corporation is having trouble earning premiums at the same high rate as it is paying out more compensation. Therefore, a higher loss ratio implies that the organisation is having financial problems.
Commission Expense Ratio
This ratio reveals what proportion of the premium is used to pay commissions. The premium you pay could or might not be directly impacted by this amount. After a certain threshold, the higher the commission expense ratio, the smaller the discount granted, resulting in a higher premium paid. Typically, lower premiums result from a low commission expense ratio. Some insurers, however, do not pass it on to the customers, keeping the premiums the same. Paying a bigger commission results in gaining more business, which will ultimately increase the worth of the insurance company. Better results are achieved with a reduced commission expense ratio. Furthermore, certain businesses could have negative commission ratios. But that does not imply that it is always beneficial. A negative commission expense ratio may result from several circumstances, including businesses that conduct direct business without charging a fee, such as state-run mass health and crop insurance programmes.
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Incurred Claim Ratio (ICR)
The entire number of claims paid by the company divided by the total premiums collected over the same period results in the incurred claim ratio, or ICR. The ICR reveals the claims-paying capacity of a general insurer. The entire value of claims resolved must be more than the total amount of premiums collected if the ICR is greater than 100%. To make the policy profitable in this situation, the business would either raise the premium payments or make significant changes to the policy. Such businesses reject speculative claims. A high ratio is not always a positive thing. Between 75% and 90% is considered a healthy ratio. Additionally, it shows that the insurance provider has a solid product on the market and is turning a reasonable profit.
Combined ratio
This represents the overall outflow for a general insurance company’s net earned premium in terms of operational costs, commissions paid and incurred claims and losses. Choose businesses with lower combined ratios since they have smaller expenses or losses compared to their premium revenue during that time. “If the combined ratio is more than 100 per cent, it typically indicates that the insurance company’s cash outflow exceeds its earned premium, which is not a good sign for its financial health. A low ratio indicates that costs are lower than premium income. A high ratio may not always signify a corporation that is losing money. According to experts, the larger combined ratio does not indicate that the business is losing money because it excludes investment revenue and earnings.
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Insurance Ratios Formulas
Financial ratios are used to evaluate an entity’s overall financial performance. They also assist in assessing how well the company performs in comparison to its competitors. Financial ratios are a “means” to understanding an entity’s fundamentals rather than an “end” in and of themselves. To assess insurance firms, a common set of ratios can be employed. These can be categorised into three groups:
- Earnings
- Liquidity
- Solvency
These are outlined in greater detail below.
Earnings Ratios
Insurance firms can only continue to function as a going concern if their operations are profitable. An insurer’s capacity to effectively transfer its strategies and competitive advantages into growth possibilities and stable profit margins is the key to measuring earnings.
| No. | Ratio | Significance | Formula |
| 1 | Premium Growth | shows an increase in the volume of business the insurance firm is conducting. | {(GPWT – GPWT-1)/ GPWT-1} * 100
|
| 2 | Risk Retention | shows how much risk the insurer has maintained compared to the amount that has been transferred to reinsurers.
Reinsurance is crucial to the process of dispersing risk. |
Net Premium Written/
Gross Premium Written |
| 3 | Loss Ratio | The ratio calculates the company’s annual loss experience as a percentage of premium income. The loss ratio reflects the type of risk underwritten as well as the suitability or unsuitability of risk pricing. | [Net Claims Incurred/
Net Premium Earned] * 100 |
| 4 | Expense Ratio | The efficiency of insurance operations is shown by the expense ratio. By line of business, an insurer’s expense ratio is examined, along with its trend. | Management Expense
+/ (-) Net Commission Paid/(Earned)T divided by Net Premium Earned multiplied by 100 |
| 5 | Combined Ratio | After accounting for claims costs and operating expenses, an insurance company’s underwriting profitability is measured by the combined ratio. | Loss Ratio + Expense Ratio |
| 6 | Investment Yield | The average return on the company’s invested assets, both before and after capital gains and losses, is measured by this ratio. Both realised and unrealized capital gains are taken into account when calculating the investment yield incorporating capital gains. | Total Investment Income/
Average Total Investments |
| 7 | Net Earnings
Ratio |
After accounting for underwriting outcomes, operational costs, investment income, and taxes, this ratio calculates an insurer’s overall profitability. | Profit After Tax/
Net Premium Written |
| 8 | Return on Net worth | This ratio reflects the after-tax return produced on an insurer’s net value. It serves as a gauge of the overall return on invested capital in the company. | Profit After Tax/
Average Net worth |
| 9 | The ratio of Net Written Premiums to Policyholder Surplus | This ratio calculates the amount of capital surplus required to write premiums. To pay claims, an insurance company’s balance sheet must be heavy on assets. The amount by which assets exceed liabilities in the industry is referred to as the statuary surplus. | .. |
| 10 | Return on Revenues | This figure determines an insurance company’s profitability. It is the insurance company’s profit after all expenses and taxes are deducted. | Net Operating Income / Total Revenues) |
| 11 | Return on Assets | Net operating income is divided by Mean Average Assets by USBR to determine the return on assets. The profitability of current investment securities and premiums is depicted in this graph. The better the corporation can increase returns on its current liquid assets, the higher the return on assets. | Net Operating Income / Mean Average Assets |
| 12 | Return on Equity | The net earnings distributed to shareholders are depicted in this graph. The likelihood of increased dividend payments to shareholders increases with a higher return on equity for the company. | (Net Operating Income (less preferred stock Dividends / Average Common Equity ) |
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Liquidity Ratios
The insurance business can fulfil policyholder obligations more quickly with good liquidity. The degree to which an insurer can meet its financial obligations through strong, diversified, liquid investments, operating cash flows, and cash on hand, is reflected in the liquidity of that insurer. A high level of liquidity enables an insurer to satisfy unforeseen cash needs without having to sell investments prematurely, which could result in significant incurred losses owing to cyclical market circumstances and/or tax repercussions. The liquidity ratios taken into account are
| No. | Ratio | Significance | Formula |
| 1 | Liquid Assets to
Current Liabilities |
This ratio reveals an insurer’s capacity to cover its short-term obligations without borrowing money or selling off long-term assets. The liquidity of the insurer is sensitive to the cash flow from premium collections if this ratio is less than one. | Liquid Assets/
Current Liabilities |
| 2 | Liquid Assets to
Technical Reserves |
Technical reserves are funds set aside to handle potential “anticipated” claims. A higher percentage of liquid assets would aid the insurer in handling these “anticipated” claims, even though it may not be expected for an insurer to maintain liquid assets equal to technical reserves. | Liquid Assets/
Technical Reserves |
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Solvency Parameters
Meeting responsibilities to policyholders is based on having an adequate solvency margin. The regulator’s solvency margin standards, as set forth from time to time, must be complied with by all insurance businesses. For Indian insurance businesses, the IRDA currently mandates a “Solvency Margin” of 1.5 times. The capital adequacy ratio of banks and Insurance firms’ “solvency margin” is similar.
| No. | Ratio | Significance | Formula |
| 1 | Solvency Ratio | Compliance with the minimum requirement of 1.5 times is examined, as is the cushion available above the regulatory minimum. | Available Solvency Margin/
Required Solvency Margin |
| 2 | Operating
Leverage |
This ratio reflects an insurer’s present as well as eventual underwriting capacity. | Net Premium Written/
Net worth |
Different financial institutions, including banks, financial service providers, insurance providers, securities firms, and credit unions, have significantly different methods for disclosing financial data. The most important information to examine the financial accounts of an insurance firm is provided in this article. Download the Entri app to learn more about the ratios of insurance companies.
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