Benefit-Expense Ratio: Definition, Calculation, and Methods
Benefit-Expense Ratio: What Is It?
The benefit-expense ratio is used in the insurance industry to characterize the percentage of revenue received by a business in relation to the amount of money paid out in claims. It is an important operational statistic that is computed by dividing the expenses incurred by a business in providing insurance coverage by the income received from premiums. Sometimes, it is shortened to just the expense ratio.
A single percentage adjustment in the benefit-expense ratio can have a big effect on the company’s net profitability because of the large monetary amounts involved.There is a possibility that
Gaining Knowledge of the Benefit-Expense Ratio
An insurer’s costs for underwriting insurance are compared to the money it makes from such policies using the benefit-expense ratio. Since this ratio would show an increase in top-line growth in relation to costs, insurance companies often want to reduce it. A company’s gross revenue is shown on the top line of its financial statement. The whole value of the services rendered to clients is displayed on this line. The expenditures are listed in the following lines, which lowers the top line amount.
The benefit-expense ratio for the insurance sector is calculated by dividing the net premium by the cost of purchasing, underwriting, and maintaining a policy. Wages paid to employees, commissions paid to agents and brokers, dividends, advertising, legal fees, and other general and administrative (G&A) costs are examples of expenses.
To get a combined ratio, a business will add the benefit-expense and loss-to-gains ratios. The loss-to-gain ratio compares paid claims, including modifications, to the net premium, whereas the benefit ratio considers business expenditures. Additionally, losses for healthcare providers will be greater than those for property or casualty insurance because of the increased number of likely claims each period. The combined ratio calculates how much money leaves a business after paying costs and total losses in relation to premium revenue.
Various Techniques for Calculating Benefit-Expense Ratios
An insurance firm can calculate its benefit-expense ratio in one of two ways.
The ratio can be calculated conservatively using the statutory accounting (SAP) technique. The net premiums expressed as the denominator are used in the approach. The total of all underwritten premiums, both new and old, less any premiums paid to reinsurance firms, plus the reinsurance policies they took out, is the net premium.
The sum of all premiums from just the newly insured company is used under generally accepted accounting standards (GAAP), which then subtracts either the losses or the expenditures.
The ratio of benefits to expenses Using the 80/20 Rule
The 80/20 Rule, which is part of the 2010 Affordable Care Act, makes healthcare practitioners responsible to the patients they treat. The Rule governs how a business may use money received from premium payments. It is often referred to as the medical-loss ratio or the medical-cost ratio (MCR).
According to the Rule, health insurance companies are required to reimburse policyholders for 80%, or 85%, of premium income in order to cover medical expenses. The value of claims plus money spent by the business to raise healthcare quality is divided by the amount of premiums collected to determine the MCR.