Which ratio is used to measure expenses in relation to premiums?

The expense ratio is a financial metric that measures the efficiency of an insurance company by comparing its operating expenses to its earned premiums. It provides insight into how much of the premium income is being used to cover the costs of running the business, such as administrative expenses, commissions, and other operational costs.

Calculating the expense ratio involves dividing the total expenses (excluding losses) by the earned premiums. A lower expense ratio signifies that the company is keeping its expenses under control relative to the premium income, which is critical for profitability in the insurance industry.

This ratio is vital for assessing an insurer’s operational efficiency and helps stakeholders understand the relationship between the costs incurred and the income generated from premiums. Thus, the choice of the expense ratio accurately reflects the measure of expenses in relation to premiums, distinguishing it from other financial ratios that might focus on different aspects of insurance company performance.