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
commercial
broker, direct, or digital
broker
independent can transact with multiple insurers) or exclusive (works for 1 company and knows them really well)
is an independent or exclusive insurer better for the policyholder?
independent- they can check out the whole market - earn a commission though, which may suggest a higher price
benefits of a digital commercial insurer?
reduce expenses; don’t have to pay any brokers b/c its all online
negatives of a digital commercial insurer?
no negotiations
personal insurer
- independent agent (or broker) vs. exclusive (captive) agent
- direct sales: phone, internet, apps, etc
- trends in insurance
losses =
dollars for claims
loss and adjustment expenses
expenses for paying claims
underwriting expenses
service and admin. expenses
investment returns
investment gains and other income/premiums
what does the ER tell us?
efficiency of co.
what does the LR tell us?
return to policyholders
what does the CR tell us?
the success in accepting risk
what does the OR tell us?
the combined profitability
low LR w/o benefit of highly valuable services
not desirable
high LR and high ER =
could imperil the financial strength (solvency) of the insurer over the long run
