Profitability

 

There are numerous methods to quantify the profitability of Oregon's workers' compensation market.  One widely used measure is the combined ratio.  Although there are two different ways to calculate this ratio, this report defines the combined ratio as the sum of the loss ratio, the expense ratio, and the policyholders' dividend ratio. The loss ratio has been described in a previous section.  The expense ratio is calculated by dividing expenses by written premium.  The policyholders' dividend ratio is obtained by dividing dividends (to policyholders) by earned premium.  If the combined ratio is below 100 percent, it indicates that the industry is paying out less in losses, expenses, and dividends than it is taking in as premium, and is therefore profitable.  Conversely, if the combined ratio is in excess of 100 percent, it indicates that expenditures exceed premium income.  It should be noted that the combined ratio is a simple measure and does not reflect investment income, which can be a significant source of profit.

 

 

Another measure of the profitability of an insurer is the percent of direct premiums return on net worth as calculated and reported in the NAIC's Report on Profitability by Line by State.  This measure takes into account investment income and allows one to evaluate the profits earned in a particular market in relation to the net worth that is committed to that market.  For this measure, profit on insurance transactions is equal to underwriting profits plus investment gain on insurance transactions minus estimated related federal income taxes.  The return on net worth is equal to profit after taxes divided by allocated capital and surplus adjusted to place it on a generally accepted accounting principles (GAAP) basis.  In the calculation of this measure, capital and surplus is allocated to each line/state on the same basis used for the total investment gain allocation.  GAAP-adjusted net worth in the report is equal to statutory capital and surplus plus excess statutory

 

 

 

Source: NAIC Profitability Report, 2005  Last updated 4/2006

 

reserves, unauthorized reinsurance, non-admitted assets, prepaid expense and salvage/subrogation, minus deferred taxes.  The data and definition for this measurement comes from the above-mentioned NAIC report.  Oregon's ten-year average direct return on net worth amounts to 5.3 percent, lower than the ten-year countrywide average of 7.4 percent.