Loss And Loss-Adjustment Reserves To Policyholders' Surplus Ratio

Here's how insurance companies make money: they collect premiums from customers, invest that money, build up a pile of cash, then pay out client claims with those collected funds. As long as customer claims don't devour the cash the company's collected, it makes money.

The loss and loss-adjustment reserves to policyholders' surplus ratio describes this relationship for a mutual insurance company, or one where the policyholders actually own the firm.

The loss and loss-adjustment reserves represent the money the insurance company has set aside for claims. The firm estimates how much it will likely have to pay out, and sets aside an appropriate fund to pay for the expenses.

The policyholder surplus represents the insurance company's total assets, minus its liabilities. It's the amount the firm has leftover once it covers everything it owes. The figure is called a "policyholder surplus" because we're talking about a mutual insurance company...one structured so that policyholders own the company.

So, despite its long name, the loss and loss-adjustment reserves to policyholders' surplus ratio simply denotes this: the amount the insurance company has set aside for potential claims compared to the total assets it possesses (minus its liabilities). What it might need to pay in losses versus what it could potentially sell to raise cash.