Premium to Surplus Ratio

Running an insurance company is like being a professional gambler. You do what you can to keep percentages on your side. But sometimes you're going to lose...and occasionally those losses will mount faster than expected.

In short, you'll hit a losing streak. Two big hurricanes will come in a single year, when you had priced things expecting one. You projected that 5% of your clients will have car accidents this year, but it turns out that 7% did. You didn't plan on that swarm of locusts.

Whatever the cause, an insurance company has to be ready to ride out some losing streaks. The premium-to-surplus ratio defines how well a company can do that. It measures the ability of an insurance company to deal with unexpectedly high levels of claims. By extension, it provides a proxy for the firm's overall financial strength.

To calculate the figure, start with net premiums written. That stat basically measures the amount of outstanding coverage the company has taken on.

Divide net premiums written by the firm's surplus, a figure that tracks its net assets. Subtract an insurer's liabilities from its assets...the resulting figure represents its surplus.

Dividing net premiums written by surplus provides the premium-to-surplus ratio. The higher the number, the better able the company can deal with a string of bad luck. A lower number, on the other hand, might signal bad news if another locust swarm hits.