FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
A property-casualty insurer reports the following for a year: premiums earned of $200 million, losses and loss adjustment expenses incurred of $130 million, and underwriting expenses of $50 million. Ignoring dividends to policyholders, what is the combined ratio?
The combined ratio is 90%. It equals the loss ratio of 65% (130/200) plus the expense ratio of 25% (50/200). A figure below 100% indicates an underwriting profit before investment income, which is not part of the combined ratio.
- A65%
- B90%Correct
- C100%
- D90% plus investment income offset
Explanation
Loss ratio = 130/200 = 65%. Expense ratio = 50/200 = 25%. Combined ratio = 65% + 25% = 90%. Option 65% counts only the loss ratio. A combined ratio does not include investment income, so the last option is not a valid measure.
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