Ceded Reinsurance Leverage
The ratio of ceded insurance balanced to policyholders’ surplus is known as Ceded Reinsurance Leverage. The limit to which an insurance company depends on ceding risk to reinsurers is provided by Ceded Reinsurance Leverage. Net balances for unpaid losses, unearned premiums and ceded premiums are included in it. In exchange for a portion of the premiums, companies earn from writing policies they use reinsurance as a means to shift risk off of their portfolios. Insurance companies decrease their exposure to a possible surge in claims by moving some of the obligations to another company which indicates that it is a fairly common occurrence in the industry.
Ceded reinsurance leverage is used to measure the dependence of an insurance company on shifting policy risks to others. A company’s heavy dependence on others to help settle risk is indicated by a high ratio which means that it directs towards other risks. The insurance company may see itself open to a larger risk than usual if reinsurance companies ask for more money for assuming risks. The number of reinsurers a company has while shifting risk is an additional threat to the future health of an insurance company. Companies may be unable to obtain from reinsurance companies, either because those companies are unwilling to answer their obligations or because they are unable to if there is a heavy presence of ceded insurance in a small group of insurers. The insurance company could face serious risks if it only offers policies in a single state and a single line.
The ratio of deferred insurance liabilities to shareholder equity is termed as Insurance Leverage. It is quite different from Ceded Reinsurance Leverage. It used by investors performing fundamental analysis of insurance companies. In order to measure leverage and assess financial well-being for insurance organizations, the debt-to-equity ratio is an important measurement. By dividing total liabilities by total shareholders’ equity, we can calculate the debt-to-equity.
Other than the debt-to-equity ratio, we can know the insurance leverage through the premium-to-surplus ratio. The premium-to-surplus ratio can be computed by dividing total net written premiums with the surplus at the end of the year. Subtracting policyholder liabilities from policyholder assets gives us the surplus. The ability of an insurer to handle above-average losses is inspected by investors through a premium-to-surplus ratio. A bigger value in this measurement suggests a higher risk position.
Difference between Ceded Reinsurance Leverage and Insurance Leverage
Firstly we will simply differentiate between Insurance and Reinsurance. The equitable shift of risk of a loss from one entity to another in trade for money is known as Insurance. Insurance can be purchased by any individual. On the other hand, insurance purchased by an insurance company(known as ceding company) from one or more insurance company is known as Reinsurance. Reinsurance is only purchased by insurance companies directly or through a broker as a means of risk management. Now, an insurance company calculates its leverage which is called Insurance Leverage and the ceding company along with reinsurer is involved in the computation of Ceded Reinsurance Leverage.
In simple terms, it can be said that the dependency of ceding risks to a reinsurer is indicated by Ceded Reinsurance Leverage while the insurance leverage is a simple debt-to-equity or premium-to-surplus ratio used by investors to conduct a fundamental analysis of an insurance company.