Question

An insurer has the following data: loss ratio=70%; combined ratio=105%; investment profit (or income) ratio=10%; expense ratio=35%. It made an operating ___ of _____

a) Loss; 25%
b) Loss; 5%
c) Profit; 5%
d) Profit; 25%

Answer 1

The insurer made an operating profit of 5% after considering both underwriting losses and investment income, resulting in an answer of c) Profit; 5%.

Step-by-step explanation:

To determine whether the insurer made an operating profit or loss, we need to calculate the difference between the premiums earned (100%) and the combined ratio. The combined ratio consists of the loss ratio and the expense ratio. Given the loss ratio is 70% and the expense ratio is 35%, the combined ratio equals 70% + 35% = 105%. This means that for every dollar of premium earned, the insurer spent $1.05 on claims and expenses, which indicates a 5% underwriting loss. However, the insurer also earns income from investments, known as the investment profit (or income) ratio, which is 10%. To find out the overall operating profit or loss, we subtract the underwriting loss from the investment income ratio. So, we have a 10% investment profit ratio minus the 5% underwriting loss, leaving an operating profit of 5%.

Therefore, the correct answer is: c) Profit; 5%