Net premiums written is equal to direct insurance and reinsurance assumed during the period less reinsurance ceded. In the circumstance of analyzing profitability this ratio measures the efficiency with which the insurer uses its capital resources to generate business insurers with relatively low ratios are not fully utilizing their capital. However a relatively low underwriting leverage ratio is not always bad. Aggressive underwriting may lead to significant losses especially in soft markets. Also, insurers with low leverage ratios have more room for growth without having to dilute existing shareholders. Importantly the leverage ratio also measures the company’s exposure to pricing errors in its current book of business. Potential losses due to under pricing of policies are related to the amount of net business written while policyholder surplus measures the cushion available to absorb such losses.
Underwriting leverage is measured as follows:
Underwriting leverage is measured as follows: