Question

In: Operations Management

a) How is the combined ratio of a property and casualty insurance company calculated, and what does the combines ratio measure?


a) How is the combined ratio of a property and casualty insurance company calculated, and what does the combines ratio measure?

b )How is it possible for a property and casualty insurance company to be profitable if its combined ratio exceeds one (or 100%)?

Solutions

Expert Solution

1. The combined ratio is the sum of the loss ratio and the expense ratio. the loss ratio is calculated by dividing the sum of losses and loss adjustment expenses by premiums earned. the expense ratio is calculated by dividing underwriting expenses by premiums written.

The combined ratio measures underwriting profitability. If the ratio exceeds 1 , the insurer has lost money from its underwriting activities. if the combined ratio is less than 1 , it means that the insurer has made money from its underwriting activities .

2. It is important to remember that the combined ratio measures underwriting performance only. Insurance company have second source of revenues. investment income. An insurance company can lose money on its underwriting activities , but still be profitable , overall, if its investment income offsets the underwriting loss.


Related Solutions

How are the Loss and Expense Ratios of a Property & Liability insurance company calculated, and what do each ratio measure?
How are the Loss and Expense Ratios of a Property & Liability insurance company calculated, and what do each ratio measure? Why should Your Firm want to know the ratios of any insurance company proposing to write coverage for Your Firm?
How are the Loss and Expense Ratios of a Property & Liability insurance company calculated, and what do each ratio measure?
How are the Loss and Expense Ratios of a Property & Liability insurance company calculated, and what do each ratio measure? Why should Your Firm want to know the ratios of any insurance company proposing to write coverage for Your Firm? (write in a paragraph)
How does the degree of liquidity risk differ for financialinstitutions, insurance companies and property casualty...
How does the degree of liquidity risk differ for financial institutions, insurance companies and property casualty companies? What can these types of companies do to defend themselves against liquidity risk?
Contrast the balance sheet of a property-casualty insurance company with the balance sheet of a commercial...
Contrast the balance sheet of a property-casualty insurance company with the balance sheet of a commercial bank. Explain the balance sheet differences in terms of the differences in the primary functions of the two organizations.
Explain the concept of Bond Duration, what does it measure, how is it calculated, how is...
Explain the concept of Bond Duration, what does it measure, how is it calculated, how is it used, and what inputs impact its calculation? (finance question)
Question: What does the debt to equity ratio show, and how is it calculated?
  Question: What does the debt to equity ratio show, and how is it calculated?
9.         The phrase ________ describes a claim presented to a property-casualty insurance company years after the...
9.         The phrase ________ describes a claim presented to a property-casualty insurance company years after the relevant underlying insured occurrence. A.        A long-tail loss B.         A mismatched claim C.         Adverse selection D.        Social inflation E.         The underwriting cycle 10.       The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern. A.        Securities and Exchange Commission B.         Federal Deposit Insurance Corporation C.         National Association of Insurance Commissioners D.        National Association of Securities Dealers E.         none...
A property and casualty insurance company (which provides fire coverage for dwellings) felt that the mean...
A property and casualty insurance company (which provides fire coverage for dwellings) felt that the mean distance from a home to the nearest fire department in rural Alabama was at least 10 miles. It set its fire insurance rates accordingly. Members of the community set out to show that the mean distance was less than 10 miles due to the increased number of volunteer fire departments. This, they felt, would convince the insurance company to lower its rates. They randomly...
1. What is the Herfindahl-Hirshmann Index? How is it calculated? What does it measure? How do...
1. What is the Herfindahl-Hirshmann Index? How is it calculated? What does it measure? How do Federal regulators use it when examining horizontal mergers under antitrust statutes?
What is the current ratio? What is its purpose? How does this ratio measure liquidity? Explain...
What is the current ratio? What is its purpose? How does this ratio measure liquidity? Explain how the current ratio can be easily manipulated, providing a detailed illustration and example of how it can be manipulated.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT