Which ratio measures the insurer's ability to meet financial demands?

The liquidity ratio is a crucial measure of an insurer's ability to meet its financial obligations as they come due. This ratio assesses the company's capability to convert assets into cash quickly to cover liabilities, such as claims and other short-term financial demands. A higher liquidity ratio indicates that the insurer is in a better position to satisfy these obligations without jeopardizing its financial stability.

Liquidity is especially important in the insurance industry, where companies may face unexpected claims at any time. By maintaining an adequate liquidity ratio, insurers demonstrate financial health and the ability to pay claims promptly, instilling confidence in policyholders and regulators alike.

Profitability ratios, reserve ratios, and investment yield ratios, while important metrics, do not directly address the insurer's immediate capacity to meet financial obligations. Instead, they focus on aspects such as overall profit generation, the adequacy of reserves set aside for future claims, and returns on investments, respectively. Thus, the liquidity ratio stands out as the primary indicator of an insurer's short-term financial strength.