Expense Ratio

Definition:

Expense Ratio is also called as management expense ratio. This is the measure of how much of a fund's assets are used for administrative and operating expenses.

Description:

In simple words expense ratio is the measure of profitability that can be calculated by dividing the expenses incurred for writing the policy by the net premium earned by the company. The expenses for writing an insurance policy include acquiring, underwriting and servicing.

Expense Ratio= Total underwriting expenses/Net Premium Earned.

The expense ratio helps a company compare its expenses incurred to underwrite a policy against the revenue that the insurance company expects. The expense ratio is a major factor in measuring the insurance company’s efficiency and profitability. There are two methods to calculate the expense ratio. Insurance companies commonly refer to statutory accounting. They use net premiums written during the period to calculate the expense ratio.

Example:

The total underwriting expenses to write the health insurance in a year is Rs.50 lakhs. The new premium earned by the insurer under the health policies is Rs.5 crores. Expense ratio for health insurance policies written by XAC Insurance Company Limited is 50,00,00/5,00,00,000=0.01.

Back

ADV/5/22-23/289