What is the Quick Liquidity Ratio for an Insurer?

what is liquidity ratio

by Jed Giger on July 3, 2015

Not all calculations used in insurance are used to calculate premiums or risk. Many of them are used to help investors make sense of an insurance business’s financial position. This is important, particularly to those who work in the insurance industry, because it enables you to make conclusions about the long-term viability of a business.

In fact, jobseekers would be well advised to familiarize themselves with such measures and not leave the analysis to investors. After all, an insurer in a precarious position may not make for the ideal next career move.

What it is the Quick Liquidity Ratio?

The Quick Liquidity Ratio is simply the sum of an insurer’s liabilities and the insurer’s reinsurance liabilities divided into the total amount of quick assets that an insurer holds.

e.g. Quick Liquidity Ratio = Total Value of Quick Assets/(Liabilities + Reinsurance Liabilities)

What are Quick Assets?

Good question, in simple terms, a Quick Asset is one that can be quickly converted into cash. So cash itself is a quick asset as are short-term investments, shares (equities), bonds on the verge of maturing, etc.

Why Does the Quick Liquidity Ratio Matter?

The Quick Liquidity Ratio is a measure of an insurance company’s ability to easily meet its obligations. Imagine an insurer that has covered a lot of property and then there is a hurricane. That insurer is now going to have to

find more money than it would normally anticipate to pay claims.

An insurer with a high Quick Liquidity Ratio will be in a better position to make such payments than an insurer with a lower ratio. In fact, one with a lower ratio could be likely to find itself having to sell long-term assets or may even need to take out a loan to meet its obligations.

Quick Liquidity Ratios are usually given as a percentage figure. As a loose rule of thumb a company specializing in insuring property would be expected to carry a Quick Liquidity Ratio of 30% or more. Whereas a liability insurance company might only need to have a Quick Liquidity Ratio of 20% or more.

Insurers with mixed product portfolios are less easy to evaluate. It’s considered good practice for an investor to compare the insurer to other insurers with similar portfolios to see if the Quick Liquidity Ratio is appropriate for the risks insured.

It’s worth noting that the Quick Liquidity Ratio is only a single measure of an insurer’s value and should not be used in isolation to determine investments (or job searches). It should be used in combination with a range of other measures to get a more detailed and accurate understanding of the insurer.

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Source: www.riskheads.org

Category: Bank

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