Which formula is used to calculate the ratio of 'Gross Premiums Written to Policyholders Surplus'?

The appropriate formula for calculating the ratio of 'Gross Premiums Written to Policyholders Surplus' is the one that accurately accounts for all components of gross premiums while acknowledging the relevance of policyholders' surplus as a measure of financial stability.

The correct formula includes both Direct Premiums Written and Reinsurance Assumed, while also adjusting for transactions with affiliates and non-affiliates. In general, gross premiums are a broad measure of the total premiums a company is collecting, while policyholders' surplus represents the buffer that a company maintains to cover potential losses and ensure financial stability.

This comprehensive approach in the formula ensures that the ratio reflects a true picture of the company’s reliance on premiums relative to its surplus, which is vital for understanding the company's risk exposure and overall solvency. The adjustment for affiliates ensures that the calculation only considers the relevant premiums that genuinely affect the surplus from a risk perspective. Thus, this formula accurately encapsulates the importance of both side of the equation: the premiums collected and the capital reserves that back them.