Class 20

Question 1

loss ratio =

Answer 1

(losses + loss adjustment expenses) / premiums

Question 2

expense ratio =

Answer 2

other underwriting expenses / premiums

Question 3

combined ratio =

Answer 3

loss ratio + expense ratio

Question 4

operating ratio =

Answer 4

combined ratio - (investment returns/premiums)

Question 5

loss ratio

Answer 5

the ratio of incurred losses (plus loss adjusted expenses, typically) to premium. Measures underlying profitability through loss experience.

Question 6

expense ratio

Answer 6

the ratio of underwriting expenses (expenses used to attain, write and service insurance including commissions) to premium. Measures operational efficiency in “underwriting” a book of business.

Question 7

combined ratio

Answer 7

the sum of the loss ratio and expense ratio

Question 8

overall operating ratio

Answer 8

the combined ratio minus the investment income ratio. Most complete measure of an insurer’s financial performance

Question 9

investment income ratio

Answer 9

the ratio of net investment income (investment income minus investment expenses) to earned premium

Question 10

how do insurers make money?

Answer 10

pooling and investing the money they get from premiums

Question 11

how do ratios help identify when insurance is a good deal?

Answer 11

• loss control

- deductibles/ limits (expenses/risk charge)

Question 12

deductible

Answer 12

retain risk on the low end of distribution

Question 13

limit

Answer 13

retain on high end

Question 14

why would insurers lower premiums if they earn their money through investing those premiums?

Answer 14

to stay competitive

Question 15

insurer distribution (sales) major portion of expense ratio

Answer 15

commercial v personal

Question 16

commercial

Answer 16

broker, direct, or digital

Question 17

broker

Answer 17

independent can transact with multiple insurers) or exclusive (works for 1 company and knows them really well)

Question 18

is an independent or exclusive insurer better for the policyholder?

Answer 18

independent- they can check out the whole market - earn a commission though, which may suggest a higher price

Question 19

benefits of a digital commercial insurer?

Answer 19

reduce expenses; don’t have to pay any brokers b/c its all online

Question 20

negatives of a digital commercial insurer?

Answer 20

no negotiations

Question 21

personal insurer

Answer 21

• independent agent (or broker) vs. exclusive (captive) agent
• direct sales: phone, internet, apps, etc
• trends in insurance

Question 22

losses =

Answer 22

dollars for claims

Question 23

loss and adjustment expenses

Answer 23

expenses for paying claims

Question 24

underwriting expenses

Answer 24

service and admin. expenses

Question 25

investment returns

Answer 25

investment gains and other income/premiums

Question 26

what does the ER tell us?

Answer 26

efficiency of co.

Question 27

what does the LR tell us?

Answer 27

return to policyholders

Question 28

what does the CR tell us?

Answer 28

the success in accepting risk

Question 29

what does the OR tell us?

Answer 29

the combined profitability

Question 30

low LR w/o benefit of highly valuable services

Answer 30

not desirable

Question 31

high LR and high ER =

Answer 31

could imperil the financial strength (solvency) of the insurer over the long run