Page 88 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2
P. 88
READING 17: ANALYSIS OF FINANCIAL INSTITUTIONS
MODULE 17.6: INSURANCE COMPANIES
The underwriting loss ratio measures the relative efficiency of the company’s underwriting standards (whether the policies are priced
appropriately relative to risks borne), while the expense ratio measures the efficiency of the company’s operations. The underwriting loss
ratio is also called the loss and loss adjustment expense (discussed later). The expense ratio is also called the underwriting expense ratio.
Notice that the denominator in the two ratios is different. For reporting purposes, sometimes insurers use U.S. GAAP, which calls for net
premium earned as the denominator for both ratios.
The loss reserve is an estimated value of unpaid claims (based on estimated losses incurred during the reporting period). Subject to
management discretion in measurement, the loss reserve is a highly material amount. Insurers revise their estimate of the loss reserve as
more information becomes available. Downward revisions indicate that the company was conservative in estimating their losses in the first
place. Upward revisions indicate aggressive profit booking, a warning sign for analysts.
