What is the correct formula for calculating 'Net Premiums Written to Policyholders Surplus' ratio?

The formula for calculating the 'Net Premiums Written to Policyholders Surplus' ratio involves using net written premiums as the numerator and policyholders' surplus as the denominator. Specifically, the ratio provides insight into the financial leverage and risk exposure of an insurance company by measuring the amount of net written premiums in relation to the surplus funds available to absorb potential losses.

Using the net written premium indicates that the calculation reflects only the premiums that are actually retained by the insurer after accounting for reinsurance and other adjustments. This gives a more accurate picture of how much premium revenue the insurer has to support its policyholders compared to the surplus available, which represents the cushion or reserve.

Additionally, the multiplication by 100 is necessary to express the ratio as a percentage. This makes it easier to interpret and compare across different companies or industries.

The other options do not correctly represent this ratio. Gross written premium does not account for the required adjustments, while net earned premium relates to the income recognized rather than premiums written, and direct written premium focuses on the amount of premiums collected without considering deductions for reinsurance and other adjustments. Therefore, the correct approach to calculating this ratio is through the use of net written premium.