Best wishes,

Adam

Which is correct for managment expense ratio?

is it management expenses/net earned premium ie gross premium less reinsurance less(more) changes in unearned premium reserve
or

management expenses/net written premium ie gross premium less reinsurance

thanks

appreciate it a lot.

Thanks for your comment. The truth is that there is no “THE correct way” as such, insurance companies use a variety of methods – including those you describe – depending on the exact situation.

Certainly however you can create expense and combined ratios for different classes of business, in fact I’d recommend you do. Depending on the size of your operation and what you’re trying to achieve, calculating ratios across all classes of business alone may only be so useful; you also need to drill down into specific areas in order to know how those parts are performing.

The most important thing is to be consistent. Unless you compare apples to apples you’ll never know whether your operation is profitable or not. This means if you’re using Earned Premium in your calculations for one class, you must be careful do the same for the next and so on. It may sound obvious but mistakes are easily made.

If you’d like me to look at this in more detail for you, drop me a personal e-mail (you can contact me via the details you find on our About page) or add another comment. If you let me know what your ultimate goals are I’ll advise you on the best solution.

Best wishes,

Adam

I believe the expense ratio is the ratio of management expenses divided by earned premium or gross premium { depending upon how you are calulating the loss ratio–based on either of these}–Correct me / advise me.

Further, if I asssume I am correct in the above, can I calculate the combined ratio for each class of business–say Property / Motor vehicle etc.separately? We can adopt different methods of apportioning the management expenses { since many of the expenses are common to all classes of business}–say based on Gross premium written / Net Written premium / Net EARNED premium ( before commission expenses) / Net Earned Premium after commission expenses,etc. I am not sure what would be THE correct method to use. Would be grateful for your advices.

Regards–Sundaram