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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

A property-casualty insurer reports a loss ratio of 68% and an expense ratio of 29%. Investment income equals 8% of earned premiums. Ignoring taxes, what is the insurer's operating ratio and what does it indicate?

The operating ratio is 89%, which is the 97% combined ratio (68% loss plus 29% expense) less 8% investment income. Being below 100%, it shows an overall profit. Quoting 97% would give only the combined ratio and ignore the investment income offset.

  1. A97%, underwriting profit before considering investment income
  2. B89%, an overall profit after allowing for investment incomeCorrect
  3. C105%, an underwriting loss
  4. D76%, overall profit because expenses are below losses

Explanation

Combined ratio = 68% + 29% = 97%, which is below 100%, so there is an underwriting profit. Operating ratio = combined ratio minus investment income ratio = 97% - 8% = 89%. This means the insurer earns an overall profit. The 97% option gives the combined ratio, not the operating ratio.

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