FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans
An insurer's loss ratio is 72% and its expense ratio is 31%. It also pays policyholder dividends equal to 2% of earned premiums. What is the combined ratio after dividends?
The combined ratio after dividends is 105%. It is the sum of the 72% loss ratio, the 31% expense ratio and the 2% policyholder dividend ratio. Because it exceeds 100%, the insurer has an underwriting loss.
- A103%
- B105%Correct
- C101%
- D74%
Explanation
Combined ratio after dividends = loss ratio + expense ratio + dividend ratio = 72% + 31% + 2% = 105%. The 103% option omits the dividends; 74% adds only loss and dividends mistakenly; 101% subtracts the dividends.
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