What does Ratio 5 measure?

• A. It measures the liquidity of the insurer
• B. It measures the solvency of the insurer
• C. It measures the profitability of the insurer
• D. It measures operational efficiency

Answer: (C)

Profitability is the focus here. Ratio 5 is designed to capture how well an insurer turns its operations into earnings—essentially how much profit it can generate after subtracting expenses and taxes, usually expressed in relation to a base like earned premiums or policyholder surplus. This ratio reflects the earnings power of the business, accounting for underwriting results and investment income that contribute to the bottom line. A higher Ratio 5 indicates stronger earnings performance, while a lower or negative value signals weaker profitability.

This is distinct from liquidity, which looks at the insurer’s ability to meet short-term obligations, and solvency, which concerns whether the company has enough capital relative to its risk. It’s also different from operational efficiency, which focuses on cost control relative to revenue, not the ultimate profit after all expenses. Ratio 5 specifically targets how effectively the insurer converts premiums and capital into profit.