Dear everyone! I read L3 book2 page 172:“Growth of surplus: … Each dollar of additional surplus has the ability to support $2-$3 of new premiums.” I can not get the meaning. Pls help me! Thanks!
CFAI or Shweser notes?
You are referring to Schweser Book 2 p. 172, which references CFAI book 2 P318 Property Casualty insurance Co’s generally maintain Premium / Capital & Surplus between 2/1 - 3/1. Thus, each $ of Surplus supports $2-3 in additional premiums. The higher the premium / surplus ratio, the higher the risk, the less well-capitalized the P&C Co is.
Another questions with regards to non-life insurance companies.
it says that their return objective is influenced by differenct factors such as:
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competitive policy pricing
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profitability
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growth of surplus —do not understand the concept exactlly
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total return management
—As mentioned earlier, the risk-taking capacity of a cauality insurance company is measured by its r atio of premiums to capital and surplus. Generally, companies maintan this ratio between 2 to 1 and 3 to 1, althou many well capaitalized companie shave lower ratio.
can somebody explain the ratio.
premiums / (capital and surplus)
what does a ratio of 3 to 1 mean? for the premiums received i ony have a third of the capital. can not get a sense for this ratio. thanks for elaborating!
The premium may be the annual received premium paid by teh policy holders.
The total surplus = capital and surplus = asset -liabilities
Don’t quite understand what’s capital here.
from the PHD insurance glossary:
CAPITAL Shareholder’s equity (for publicly traded insurance companies) and retained earnings (for mutual insurance companies). There is no general measure of capital adequacy for property/casualty insurers. Capital adequacy is linked to the riskiness of an insurer’s business. A company underwriting medical device manufacturers needs a larger cushion of capital than a company writing Main Street business, for example SURPLUS The remainder after an insurer’s liabilities are subtracted from its assets. The financial cushion that protects policyholders in case of unexpectedly high claims. (See capital; risk-based capital)
I think the insured have a claim on surplus , but only the shareholders have a claim on capital stock .Hence the distinction ( an accounting one ).
Regulators seem to treat both together as one , because Solvency is most important to a regulator:
SOLVENCY Insurance companies’ ability to pay the claims of policyholders. Regulations to promote solvencyinclude minimum capital and surplus requirements, statutory accounting conventions, limits to insurance company investment and corporate activities, financial ratio tests, and financial data disclosure.
Thanks, janak. It helps.