Question

If the loss ratio on a line of property insurance is 75 percent, the loss adjustment expense is 13.1 percent, and the ratio of commissions and other acquisitions expenses is 19 percent, is this line profitable? (Show the steps.)

Answer 1

By adding up the loss ratio, loss adjustment expense, and acquisition expenses, which total 107.1%, it is determined that the line of property insurance is not profitable because the expenses exceed 100% of the premiums collected.

Step-by-step explanation:

To determine whether a line of property insurance is profitable, we need to add up all the expenses and compare them to the total premiums collected. The expenses are made up of the loss ratio, loss adjustment expense, and commissions and other acquisition expenses. Here are the steps:

• Add the loss ratio (75%) to the loss adjustment expense (13.1%) and the commissions/acquisition expenses (19%).
• Total expenses = 75% + 13.1% + 19% = 107.1%.
• If total expenses exceed 100%, the premiums collected are not sufficient to cover the losses and expenses, indicating that the line is not profitable.

Since the total expenses (107.1%) are greater than 100% of the premiums, this means that for every dollar collected in premiums, the insurance company spends $1.071 for claims, loss adjustment, and acquisition expenses. Therefore, this line of property insurance is not profitable as it currently stands.