Ratio 2 measures what?

• A. It measures the adequacy of surplus on a gross basis.
• B. It measures the adequacy of surplus on a net basis.
• C. It measures underwriting profitability.
• D. It measures liquidity risk.

Answer: (B)

Ratio 2 is about whether the insurer’s capital available to absorb losses is adequate after accounting for reinsurance. In other words, it measures surplus on a net basis (after reinsurance), which reflects the true cushion the company has to withstand adverse outcomes. This matters because reinsurance shields the company from some losses, so the net surplus is the relevant measure of financial strength for risk-bearing capacity. It’s not about liquidity (cash timing), nor about underwriting profitability, and it doesn’t assess adequacy on a gross basis before reinsurance.