Question

An insurance company's projected loss ratio is 78.1 percent, and its loss adjustment expense ratio is 13.5 percent. it estimates that commission payments and dividends to policyholders will add another 15 percent. what is the minimum yield on investments required in order to maintain a positive operating ratio?

Answer 1

As P&C insurers sought higher yields on their investments to offset the underwriting losses, they held corporate debt rather than government debt for a higher credit risk exposure. However, declining interest rates over some of this period resulted in P&C insurers reinvesting their interest income at lower rates.The combined ratio = 77.5% + 12.9% + 16.0% = 106.40%. In order to be profitable, the yield oninvestments has to be greater than 6.40%.