8 key ratios to assess how healthy your general insurance company really is

In our previous story of this series, we decoded the balance sheet components of general insurance companies and examined how to interpret them. We now delve into the key metrics and ratios that can help you evaluate their operations and financial health. Let's begin. 1) Gross direct premium income (GDPI) Premiums are the primary source of revenue for insurance companies. Gross direct premium income (GDPI) is the total premium companies collect before paying any reinsurance costs (premiums paid to other insurers to share risk). It reflects the company's growth potential, distribution network strength, and ability to attract customers. While high GDPI growth signals business expansion, investors must scrutinise the drivers of this growth. You should consider whether policies are being sold with robust underwriting standards, or is the insurer prioritising volume over quality. Rapid growth driven by underpricing risks can lead to future claims exceeding premiums earned. 2) Net premium and retention ratio After paying the reinsurer, the insurance company keeps the remaining premium. It is called the net premium and it reflects the income directly retained by the company. The premium retention ratio (net premium divided by gross premium) reveals how much of the risk the insurance company is keeping for itself, as opposed to passing it on to other insurers through reinsurance. A high retention ratio means the company is keeping a larger share of the risk. This shows that they are confident in handling the claims that may arise. But, if too many claims arise, the company could also face significant financial strain. A low retention ratio means the company is passing more of the risk to others, reducing its exposure to large losses. This could be a sign that the company is more cautious and less willing to take on too much risk. For instance, ICICI Lombard and GoDigit reported FY24 retention ratios of 71 per cent and 85 per cent, re

This article was originally published on December 02, 2024.