Class 20 Flashcards
loss ratio =
(losses + loss adjustment expenses) / premiums
expense ratio =
other underwriting expenses / premiums
combined ratio =
loss ratio + expense ratio
operating ratio =
combined ratio - (investment returns/premiums)
loss ratio
the ratio of incurred losses (plus loss adjusted expenses, typically) to premium. Measures underlying profitability through loss experience.
expense ratio
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.
combined ratio
the sum of the loss ratio and expense ratio
overall operating ratio
the combined ratio minus the investment income ratio. Most complete measure of an insurer’s financial performance
investment income ratio
the ratio of net investment income (investment income minus investment expenses) to earned premium
how do insurers make money?
pooling and investing the money they get from premiums
how do ratios help identify when insurance is a good deal?
- loss control
- deductibles/ limits (expenses/risk charge)
deductible
retain risk on the low end of distribution
limit
retain on high end
why would insurers lower premiums if they earn their money through investing those premiums?
to stay competitive
insurer distribution (sales) major portion of expense ratio
commercial v personal
