CandleFocus

Gross Leverage Ratio

The Gross Leverage Ratio (GLR) is a measure of an insurance company’s solvency that indicates how well the insurer can absorb losses. It encompasses three major components of an insurance company’s financial structure: the net premiums written ratio, net liability ratio, and ceded reinsurance ratio.

Net Premiums Written Ratio The first element of the Gross Leverage Ratio is the net premiums written ratio, which is the sum of the company’s reinsurance premiums written and premiums written minus ceded premiums. This is the ratio of the total amount of premiums written by the company minus any ceded premiums to its shareholders’ equity.

Net Liability Ratio The second component of the Gross Leverage Ratio is the net liability ratio. This is the ratio of an insurer’s total liabilities to total equity, reflecting the portion of the company’s liabilities (benefits payable and policyholder liabilities) relative to the amount of capital held by the company.

Ceded Reinsurance Ratio The last element of the Gross Leverage Ratio is the ceded reinsurance ratio, which is the ratio of premiums ceded by the insurer to shareholder’s equity. Ceded reinsurance is a type of insurance in which the insurer transfers some of their risk to a third party. This helps insurers manage their risk exposure and reduce their premiums.

In sum, the Gross Leverage Ratio is a comprehensive measure used to assess the overall financial strength and stability of an insurance company. It combines three components – net premiums written ratio, net liability ratio and ceded reinsurance ratio – to form an indication of the insurer’s ability to meet its financial obligations in the face of pricing and estimation errors. It also provides an indication of the insurer’s risk exposure. As such, the Gross Leverage Ratio is a tool used by both insurers and their investors for assessing the insurer’s solvency.

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