Question

An insurer has a Loss Ratio of 60%, an Expense Ratio of 25%, and an investment profit ratio of 5%. It has made an underwriting ______ of ______

a) Profit; 15%
b) Loss; 30%
c) Loss; 10%
d) Profit; 30%

Answer 1

The underwriting profit for the insurance company in question is 20%, not any of the given options, since the combined ratio (sum of Loss Ratio and Expense Ratio) is 85% and reducing the investment profit ratio yields 80%.

Step-by-step explanation:

The question involves calculating the underwriting profit or loss for an insurance company. Given the Loss Ratio at 60%, the Expense Ratio at 25%, and an investment profit ratio of 5%, we can determine the overall profitability.

The combined ratio is the sum of the Loss Ratio and Expense Ratio. In this case, it’s 60% + 25%, which equals 85%. To assess the underwriting performance, we compare the combined ratio to 100%. A combined ratio under 100% indicates underwriting profit, while over 100% indicates a loss. Since the investment profit ratio adds to the insurer's income, we subtract it from the combined ratio.

The resulting figure would be the combined ratio minus the investment profit ratio, which is 85% - 5% = 80%. Hence, with an 80% final figure, the company makes an underwriting profit of 20% (as 100% - 80% = 20%), not 15%, 30%, or 10%. Therefore, none of the given options is correct. The fundamental law of insurance emphasizes that the average person’s payments into insurance should cover claims, company operating costs, and allow for firm profits.