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Analysis Of Insurance Financial Statements

1806 words - 7 pages

The Underwriting Expense Ratio measures efficiency by comparing the amount of losses incurred while making a sale and issuing a policy to the amount of premiums for all policies sold in a certain accounting period. It calculates the percentage of written premiums that go toward paying expenses associated with a new policy before any claims are paid out. The smaller the numerator (underwriting expenses), the lower the ratio. Therefore, by minimizing underwriting expenses, a company can improve efficiency. Of the 4 companies I researched, Dakota Truck Underwriters were the most efficient in this area with a ratio of 19.5%. Drivers Insurance Company had the largest Underwriting Expense Ratio, despite having the lowest amount of underwriting expenses relative to the other 4 companies. However, their ratio was the largest because they had the least amount of premiums written. While calculating all 4 ratios, I found that the Daily Underwriters of America and Discover Property & Casualty Insurance Company did not have any Total Other Income. Perhaps this is why their ratios were larger than Dakota Truck Underwriters.The Loss Adjustment Expense Ratio also measures efficiency, but does so by calculating the percentage of earned premiums that are used to pay claim costs other than the claim itself. These consist of attorney's fees, acquiring expert witnesses for trial purposes, hiring a claims department, etc. Much like the Underwriting Expense Ratio, it is best to minimize this ratio by minimizing the amount of adjustment costs and maximizing the amount of earned premiums through sales. In my report, the Daily Underwriters of America did the best job at this task. And surprisingly, Dakota Truck Underwriters had the highest ratio. Each of the other 4 companies had a lower LAE Ratio compared to their Underwriting Expense Ratio. Dakota Truck Underwriters' was 3.6% higher. Perhaps because they concentrate on reducing Underwriting Expenses, they are not so concerned with minimizing LAE. This would be an area they need to work on in order to increase their efficiency.Comparing Loss Ratios (Pure Loss and Losses including LAE) These ratios measure the percentage of premiums that go toward paying claims (and adjusting them if LAE is included). They are related directly to the idea of minimizing the cost of risk. A firm wants to offset unexpected increases in losses with cash inflows, hedging arrangements, and other risk transfers. By doing so, they reduce cash outflows and increase the value of their firm. The lower the amount of losses, the smaller percentage of cash inflows from premiums must be used to pay them. By carefully planning for expected and unexpected losses, a firm can free up premium funds for use in other financial operations and increased profitability. In my report, Discover Company had the highest amount of incurred losses (not including LAE), but their Pure Loss Ratio was second highest to Drivers Company. This is because Drivers...

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