Net Liabilities To Policyholders’ Surplus
What Does Net Liabilities To Policyholders’ Surplus Mean?
Net liabilities to policyholders’ surplus is an evaluative ratio that measures an insurance company’s ability to meet its estimated future liabilities. Net liabilities include unearned premiums, unpaid claims, and reserve estimation errors, while policyholders’ surplus essentially represents the company’s net worth. The ratio of these two figures indicates how effectively an insurance company has allocated reserves for future claims and whether it is relying on its surplus to cover losses that should be paid from the loss reserves.
Insuranceopedia Explains Net Liabilities To Policyholders’ Surplus
The National Association of Insurance Commissioners (NAIC) considers a ratio of less than 2, or 200 percent, to be acceptable. A ratio greater than this may indicate that the company is potentially dipping into funds that are not designated as loss reserves, which could signal financial instability. This ratio is of particular interest to financial managers and investors, as it is useful in assessing a company’s financial stability and can help forecast its profitability.
