What does the term "premium-to-surplus ratio" measure in insurance?

The term "premium-to-surplus ratio" is crucial in assessing the financial strength of an insurance company. This ratio compares the amount of premiums an insurer collects to its surplus, which is the excess of assets over liabilities. A lower ratio suggests that the company is less reliant on premiums for its financial stability, indicating stronger financial health and greater capacity to absorb losses. Conversely, a high ratio may point to potential risks, as it implies that the insurer is heavily dependent on premiums, which can be a warning sign of financial instability. Insurance regulators and industry analysts often use this ratio to gauge the overall risk-bearing capacity and solvency of an insurer, making it an essential measure in the financial assessment of insurance companies.