what is the gross leverage ratio 
the gross leverage ratio is the sum of an insurance company s net premiums written ratio net liability ratio and ceded reinsurance ratio the gross leverage ratio is used to determine how exposed an insurer is to pricing and estimation errors as well as its exposure to reinsurance companies understanding the gross leverage ratiothe ideal gross leverage ratio depends on what type of insurance a company is underwriting however the desired range typically falls below 5 0 for property insurers and 7 0 for liability insurers an insurer s gross leverage will usually be higher than its net leverage because the gross leverage ratio includes ceded reinsurance leverage other insurance leverage ratios include net leverage reinsurance recoverables to policyholders surplus and best s capital adequacy ratio bcar the gross leverage ratio can sometimes make an insurer s situation look more dangerous than it actually is because of the inclusion of ceded reinsurance an insurance company has to balance two primary goals it must invest the premiums it receives from underwriting activities to return a profit and limit the risk exposure created by the policies that it underwrites insurers may cede premiums to reinsurance companies to move some of the risks off their books credit rating agencies typically look at several different financial ratios when determining the health of an insurance company these ratios are created through an examination of the insurer s balance sheet the gross leverage ratio is just one type of leverage ratio there are several financial measurements for analyzing the ability of a company to meet its financial obligations leverage ratios are important because companies rely on a mixture of equity and debt to finance their operations knowing the amount of debt held by a company is useful in evaluating whether it can make payments as they come due insurers may set a target for an acceptable gross leverage ratio similar to how a central bank may set an interest rate target an insurer may accept a higher gross leverage ratio in some situations such as when it uses debt to acquire another company gross leverage ratio vs net leverage ratiothe gross leverage ratio can be thought of as a first approximation of the exposure of an insurer to pricing and estimation errors the net leverage ratio is usually a better estimate of exposure but it can be more challenging to obtain in actual practice the gross leverage ratio will be higher than the net leverage ratio under normal conditions so it tends to overestimate exposure to see why this is true we need to consider the definition of the gross leverage ratio the gross leverage ratio is defined as the net premiums written ratio plus the net liability ratio plus the ceded reinsurance ratio it can also be expressed as net premiums written policyholders surplus net liabilities policyholders surplus ceded reinsurance policyholders surplus or net premiums written net liabilities ceded reinsurance policyholders surplus net premiums written plus ceded reinsurance is equal to premiums written so it follows that the gross leverage ratio can be expressed as premiums written net liabilities policyholders surplus we need only three pieces of data to compute the gross leverage ratio they are premiums written net liabilities and policyholders surplus however the gross leverage ratio often overestimates liability most insurers rely on larger firms or groups of firms for reinsurance in case of disasters for example a company that sells homeowners insurance in a particular area might cede some of their premiums to protect themselves if the area is flooded you may even notice flood damage as an optional extra item on your homeowners insurance policy when you select this option the additional premium for flood damage may ultimately go to a separate reinsurance company this ceded reinsurance is not usually part of an insurer s exposure ceded reinsurance involves agreements between large companies so it can be difficult to determine in some cases once we have it we can subtract ceded reinsurance from premiums written to determine net premiums written the net leverage ratio is equal to the net premiums written ratio plus the net liability ratio it can also be expressed as net premiums written policyholders surplus net liabilities policyholders surplus or net premiums written net liabilities policyholders surplus the net leverage ratio is generally lower than the gross leverage ratio and it is usually more accurate however even reinsurance firms can fail the gross leverage ratio describes the insurer s exposure in a worst case scenario where the insurer cannot rely on reinsurance 