An insurance company’s surplus, the equivalent of capital and retained earnings or net worth for a manufacturing company, is the amount by which assets exceed liabilities. It provides a cushion for absorbing above-average losses. The premium to surplus ratio is designed to measure the adequacy of this cushion or the company’s financial strength. The ratio is computed by dividing net premiums written by the surplus. A company that has $2 in net premiums written for every $1 of surplus has a 2-to-1 premium to surplus ratio. The lower the ratio, the greater the company’s financial strength. State regulators have established as a guideline a premium to surplus ratio no higher than 3 to 1.
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This ratio is designed to measure the ability of the insurer to absorb above average losses and the insurer’s financial strength. The ratio is computed by dividing net premium written by surplus. An insurance company’s surplus is the amount by which assets exceed liabilities. The ratio is computed by dividing net premium written by surplus.