Ratios

Question 1

Nature of business

Answer 1

Investment income/ premiums (or claims)

Real LT assets/ total assets

Question 2

Claim settlement pattern

Answer 2

Time to settlement = 1/(Claims paid / OS and future claims reserve)

Question 3

Financial strength

Answer 3

Solvency margin = Asset/ liabilities

Question 4

Profitability and performance

Answer 4

• Gross and net claim ratio
• Expense and commission ratio
• Investment performance = investment income/ assets
• Return on capital = Post-tax profit/ free reserves at start of year (=total end of year reserves – post-tax profit)
• Profit margin = profit (gross/net) / net earned premium

Question 5

Investment income/ premiums (or claims)

Answer 5

High = class with long term claims (eg liability claims)

Question 6

Real LT assets/ total assets

Answer 6

High – implies large proportion of liabilities are LT and real

Question 7

Reinsurance

Answer 7

Large diff between reins ceded based on premium and based on claim indicates good/poor value or more/less claims than average
Proportion reinsured = high = new/unusual/volatile class of business

Question 8

Solvency margin = Asset/ liabilities

Answer 8

• Need to compare to regulatory minimum and that of competitors
• High risk business (eg liability) = higher than average sol margin
• Look at previous years for trends in ratios
• Consider strength of provisioning basis

Question 9

Gross and net claim ratio

Answer 9

• Longer tail business may be higher, as insurer can expect sufficient investment income to offset losses due to claims
• High ratios may also be due to one-event or market may be at the bottom of the UW cycle

Question 10

Expense and commission ratio

Answer 10

Consider level of NB – if this is volatile than pattern of premiums, claims and expenses will be distorted

Question 11

Investment performance = investment income/ assets

Answer 11

• Consider if realised/ unrealised gains are included in income figure (and therefore in profit and loss account)
• Ideally take average of start of year and end of year asset value figure

Question 12

Ret on capital/ prof margin

Answer 12

Consider trends, unusual events, strength of basis and competitors