Georgia Property & Casualty Practice Exam

An insurer's profitability is determined by its combined ratio, which equals what?

1. Incurred losses minus premium reserves

2. Expense ratio minus net reserves

3. Incurred expenses plus written premium

4. Loss ratio plus expense ratio

The correct answer is: Loss ratio plus expense ratio

The correct answer is that an insurer's profitability is determined by the combined ratio, which equals the loss ratio plus the expense ratio. This ratio is a key performance metric within the insurance industry, as it provides a comprehensive measure of an insurer's overall efficiency and profitability in underwriting operations. The loss ratio reflects the portion of incurred losses in relation to earned premiums, indicating how much the insurer is paying out in claims relative to the income generated from premiums. The expense ratio, on the other hand, represents the underwriting expenses in comparison to earned premiums, covering costs such as commissions, administrative expenses, and other operational costs. When combined, these ratios give a clear picture of whether an insurer is operating profitably or at a loss. A combined ratio under 100% indicates profitability, as it means that the insurer is earning more in premiums than it is paying out in claims and expenses. Conversely, a combined ratio over 100% indicates a loss in operations, highlighting that expenses and claims exceed premium income. The other choices do not accurately represent the combined ratio or its components. They incorporate terms inaccurately associated with insurance financials, leading to misunderstandings about how profitability is assessed within the industry.