FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
An insurer has a combined ratio of 108% on earned premiums of $500 million. Investment income earned on policyholder funds and surplus is $60 million, and taxes are ignored. What is the insurer's pre-tax operating profit?
Pre-tax operating profit is $20 million. A 108% combined ratio on $500 million of premiums gives an underwriting loss of $40 million, which is offset by $60 million of investment income, leaving a net gain of $20 million.
- A$20 millionCorrect
- B$40 million
- C$60 million
- D$100 million
Explanation
Underwriting result = (1 - 1.08) x 500 = -$40 million. Adding investment income of $60 million gives $20 million. Choosing $100 million adds the underwriting loss instead of subtracting it; $60 million ignores the underwriting loss.
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