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

A property-casualty insurer reports the following for a year: earned premiums of $200 million, incurred losses and loss adjustment expenses of $140 million, and underwriting expenses of $50 million. Using the standard definitions in which the combined ratio is the loss ratio plus the expense ratio, what is the combined ratio?

The combined ratio is 95%. The loss ratio is 140/200 = 70% and the expense ratio is 50/200 = 25%, and the two add together. A combined ratio below 100% means the insurer made an underwriting profit before investment income.

  1. A70%
  2. B75%
  3. C95%Correct
  4. D105%

Explanation

Loss ratio = 140/200 = 70%. Expense ratio = 50/200 = 25%. Combined ratio = 70% + 25% = 95%. The 70% option is only the loss ratio and ignores expenses; 75% is the loss ratio plus 5 points of a wrongly computed figure; 105% would result from adding in an unrelated amount.

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