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In: Finance

6. A property insurer provided the following information: Premiums written &

6. A property insurer provided the following information:

Premiums written $55,000,000

Expenses incurred 9,000,000

Incurred losses & loss adjustment expenses 38,000,000

Earned Premiums 42,000,000

a. What is the loss ratio? (1 point)

b. What is the expense ratio? (1 point)

c. What is the combined ratio? (1 point)

d. What does it mean for an insurer to have a combined ratio > 1? Why might this be acceptable to the insurer? (1 point)

Expert Solution

A) loss ratio= incurred losses & loss adjustment/ premium earned

= 38,000,000 / 42,000,000

= 90.48%

B) Expense ratio= expense incurred / premium written

= 9,000,000 / 55,000,000

= 16.36%

C) Combined ratio = loss ratio + expense ratio

= 90.48% + 16.36%

= 106.36% or 1.0636

D) A combined ratio is a measure of an insurance company's profitability expressed in terms of the ratio of total costs divided by total revenue—which for insurance companies translates to incurred losses plus expenses divided by earned premiums. A ratio above 100 percent means that company is paying out more money in claims that it is receiving from premiums.

Ratio above 1 is still acceptable because company can potentially still be profitable because the ratio does not include investment income.

jeff jeffy answered 2 years ago

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