Final answer:
The financial health of an insurance company is measured by loss ratios, which compare indemnity payments and reserves to Premiums Earned. These reflect the company's ability to cover claims, operating costs, and generate profit from the funds received.
Step-by-step explanation:
The financial health of an insurance company is measured by loss ratios, which compare indemnity payments and reserves to Premiums Earned. An insurance company's financial stability is directly related to its ability to manage the funds it receives from premiums, the income it generates from investments, and its efficiency in paying out claims and managing operating expenses. One of the fundamental laws of insurance is that, over time, the average person's payments into insurance must cover the average person's claims, the costs of running the company, and provide for the firm's profits. These premiums, along with investment income, form the primary inflow of funds, while claims and operating expenses represent outflows.