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.
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.
