What is computed by summing the loss reserve liabilities and the unearned premium reserve and then dividing that sum by policyholder surplus?

Question

Options

• AGross miscellaneous ratio
• Bnet leverage ratio
• CTotal influential investment
• Dnet mortgage ratio

• A
  9% (3)
• B
  75% (24)
• C
  3% (1)
• D
  13% (4)

Explanation

Option B is correct because the net leverage ratio is defined as (Loss Reserve Liabilities + Unearned Premium Reserve) ÷ Policyholder Surplus. This ratio measures how heavily an insurer's obligations are leveraged against its equity cushion (surplus), giving regulators and analysts a snapshot of financial risk concentration.

Why the distractors are wrong:

• A (Gross miscellaneous ratio): Not a standard insurance metric; "gross" ratios typically refer to pre-reinsurance figures and no recognized formula matches this calculation.
• C (Total influential investment): Not a recognized solvency metric; investment-related measures focus on asset values and yields, not reserve-to-surplus relationships.
• D (Net mortgage ratio): A real estate lending concept with no connection to insurance reserve analysis.

Memory tip: Think of the net leverage ratio as the "weight on the safety net" - the numerator (reserves + unearned premiums) is the total weight of obligations, and the denominator (policyholder surplus) is the net that must absorb it. Higher leverage = thinner net = more risk.

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