The operating ratio measures a company’s overall operational profitability from underwriting and investment activities. This ratio excludes other operating income and expenses capital gains and losses and income taxes. An operating ratio greater than 100% suggests that the company is unable to generate profits from its underwriting and investment activities.
The net investment income ratio measures the income contribution of the float. Because the float results from insurance activities this component of income should also be considered when evaluating the profitability of insurance operations. However the net investment income ratio and accordingly the operating ratio often provide a poor indication of current profitability. Net investment income is earned primarily on funds obtained in prior years. Thus for growing companies net investment income understates the contribution of the current float and vice-verse for insurers experiencing a decline in the insurance book. Changes in the average tail of the policies or in investment opportunities add further noise. Therefore a better approach for evaluating the income contribution of the float is to estimate the extent to which the current losses and loss expenses are overstated.
The operating ratio is defined as follows:
The net investment income ratio measures the income contribution of the float. Because the float results from insurance activities this component of income should also be considered when evaluating the profitability of insurance operations. However the net investment income ratio and accordingly the operating ratio often provide a poor indication of current profitability. Net investment income is earned primarily on funds obtained in prior years. Thus for growing companies net investment income understates the contribution of the current float and vice-verse for insurers experiencing a decline in the insurance book. Changes in the average tail of the policies or in investment opportunities add further noise. Therefore a better approach for evaluating the income contribution of the float is to estimate the extent to which the current losses and loss expenses are overstated.
The operating ratio is defined as follows: