Insurance Intelligence — Key Metrics

VerticalServe Blogs
5 min readJul 5, 2024

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Key Ratios and Metrics for Underwriting

Loss Ratio

  • Formula: (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums
  • Purpose: Measures the percentage of premiums used to pay claims and associated expenses. Lower ratios indicate better underwriting profitability.

Expense Ratio

  • Formula: Underwriting Expenses / Written Premiums
  • Purpose: Evaluates the efficiency of the underwriting process by comparing underwriting expenses to the premiums written. Lower ratios indicate more efficient operations.

Combined Ratio

  • Formula: Loss Ratio + Expense Ratio
  • Purpose: Measures the overall underwriting profitability. A combined ratio below 100% indicates underwriting profit, while a ratio above 100% indicates a loss.

Retention Ratio

  • Formula: (Net Written Premiums / Gross Written Premiums) * 100
  • Purpose: Assesses how much business the insurer retains after ceding some of the risk to reinsurers. Higher retention ratios indicate greater retention of premium income.

Commission Ratio

  • Formula: Commissions Paid / Written Premiums
  • Purpose: Measures the percentage of premiums paid to agents and brokers as commissions. Helps in evaluating the cost of acquiring new business.

Net Premiums Written to Surplus Ratio (Capacity Ratio)

  • Formula: Net Premiums Written / Policyholders’ Surplus
  • Purpose: Assesses the insurer’s capacity to underwrite new business without jeopardizing its financial stability. Lower ratios indicate more capacity.

Earned Premiums to Policyholders’ Surplus Ratio

  • Formula: Earned Premiums / Policyholders’ Surplus
  • Purpose: Measures the relationship between the premiums earned and the insurer’s surplus, indicating the risk exposure relative to the company’s financial cushion.

Frequency and Severity Ratios

  • Frequency Ratio Formula: Number of Claims / Number of Policies
  • Severity Ratio Formula: Total Claims Costs / Number of Claims
  • Purpose: Frequency measures how often claims occur, while severity measures the average cost of claims. Both are critical for assessing risk and pricing policies accurately.

Key Metrics for Underwriting

Return on Equity (ROE)

  • Formula: Net Income / Shareholders’ Equity
  • Purpose: Measures the profitability of the insurer from shareholders’ perspectives. Indicates how effectively the company is using its equity to generate profit.

Return on Investment (ROI)

  • Formula: Investment Income / Average Invested Assets
  • Purpose: Assesses the performance of the insurer’s investment portfolio. Important for overall profitability, especially in long-tail lines of business.

Solvency Ratio

  • Formula: Policyholders’ Surplus / Total Liabilities
  • Purpose: Indicates the insurer’s ability to meet its long-term obligations. Higher solvency ratios suggest stronger financial positions.

Premium Growth Rate

  • Formula: (Current Period Premiums — Previous Period Premiums) / Previous Period Premiums * 100
  • Purpose: Measures the growth rate of the insurer’s premium income over a specified period. Indicates market competitiveness and business expansion.

Policy Lapse Rate

  • Formula: Number of Lapsed Policies / Number of Policies in Force at the Beginning of the Period
  • Purpose: Assesses the percentage of policies that are not renewed. Lower lapse rates suggest higher customer retention.

Average Premium per Policy

  • Formula: Total Premiums / Number of Policies
  • Purpose: Provides insight into the pricing and risk level of the insured portfolio. Helps in pricing strategy and product development.

Key Ratios and Metrics for Claims

Loss Ratio

  • Formula: (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums
  • Purpose: Measures the percentage of premiums used to pay claims and associated expenses. Lower ratios indicate better claims performance.

Claims Frequency Ratio

  • Formula: Number of Claims / Number of Policies in Force
  • Purpose: Indicates how often claims are filed relative to the number of policies. Helps in understanding the risk level and potential future claims.

Claims Severity Ratio

  • Formula: Total Claims Costs / Number of Claims
  • Purpose: Measures the average cost per claim. High severity may indicate larger or more complex claims.

Combined Ratio

  • Formula: Loss Ratio + Expense Ratio
  • Purpose: Reflects the overall profitability of the insurer by combining loss and expense ratios. A combined ratio below 100% indicates underwriting profitability.

Claims Settlement Ratio

  • Formula: Number of Claims Settled / Number of Claims Reported
  • Purpose: Measures the efficiency and effectiveness of the claims process. Higher ratios indicate a higher proportion of claims being settled.

Claims Outstanding Ratio

  • Formula: Claims Outstanding / Total Claims
  • Purpose: Indicates the proportion of claims that are yet to be settled. Helps in understanding the efficiency of the claims settlement process.

Claims Closure Ratio

  • Formula: Number of Claims Closed / Number of Claims Opened
  • Purpose: Evaluates the claims department’s ability to close claims relative to new claims reported. Higher ratios indicate better performance in closing claims.

Average Claims Processing Time

  • Formula: Total Time Taken to Settle Claims / Number of Claims Settled
  • Purpose: Measures the average time taken to process and settle claims. Shorter processing times indicate more efficient claims handling.

Expense Ratio

  • Formula: Claims Handling Expenses / Incurred Claims
  • Purpose: Measures the cost efficiency of the claims handling process. Lower ratios indicate more cost-effective claims management.

Key Metrics for Claims

Total Incurred Losses

  • Definition: The total amount of all claims incurred, including both paid claims and reserves for future claims payments.
  • Purpose: Provides insight into the overall claims cost for a given period.

Paid Losses

  • Definition: The total amount paid out for claims during a specific period.
  • Purpose: Tracks the actual cash outflow related to claims.

Loss Adjustment Expenses (LAE)

  • Definition: Costs associated with investigating and settling claims.
  • Purpose: Helps in understanding the expenses involved in the claims process, beyond the actual claim payments.

Reserves

  • Definition: Funds set aside to pay for reported claims that have not yet been settled.
  • Purpose: Ensures the insurer has adequate funds to cover future claims payments.

Claims Leakage

  • Definition: The difference between what was paid out and what should have been paid out if the claims were handled perfectly.
  • Purpose: Identifies inefficiencies, errors, and fraud in the claims process.

Fraud Detection Rate

  • Formula: Number of Fraudulent Claims Detected / Total Number of Claims
  • Purpose: Measures the effectiveness of fraud detection efforts. Higher rates indicate better detection capabilities.

Customer Satisfaction Score (CSAT)

  • Definition: A measure of customer satisfaction with the claims handling process, usually obtained through surveys.
  • Purpose: Indicates how well the claims process meets customer expectations.

Net Promoter Score (NPS)

  • Definition: A metric that assesses the likelihood of policyholders recommending the insurer based on their claims experience.
  • Purpose: Provides insight into overall customer loyalty and satisfaction with the claims process.

Reopened Claims Ratio

  • Formula: Number of Reopened Claims / Total Number of Claims
  • Purpose: Indicates the quality of the initial claims handling. Lower ratios suggest more effective and satisfactory initial settlements.

Conclusion

Monitoring these key ratios and metrics for underwriting and claims helps insurance companies ensure that their processes are efficient, cost-effective, and aligned with policyholder expectations. Regular analysis of these indicators allows insurers to identify areas for improvement, enhance customer satisfaction, and maintain financial stability.

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