Texas General Lines — Property and CasualtyGeneral InsuranceMedium
An insurance company reports total earned premiums of $100 million, incurred losses of $60 million, and underwriting expenses of $30 million for the year. What is the company's Expense Ratio?
- A30%
- B60%
- C90%
- D70%
Show answer & explanationAnswer & explanation
Correct answer: A. 30%
The Expense Ratio is calculated by dividing underwriting expenses by earned premiums. In this case, $30 million (underwriting expenses) / $100 million (earned premiums) = 0.30 or 30%.
Why the other options are wrong
- B. This would be the Loss Ratio ($60M/$100M).
- C. This would be the Operating Ratio if there were no investment income, or the combined ratio ($60M+$30M)/$100M.
- D. This is not a standard ratio; it might be a calculation error combining elements.
Expense Ratio
A financial ratio that measures an insurer's operational efficiency by comparing underwriting expenses to earned premiums.
- Formula: (Underwriting Expenses / Earned Premiums).
- Indicates efficiency in acquiring and servicing policies.
- Lower ratio generally indicates better efficiency.
Memory trick: Losses and Expenses make an OPERATING COMBINATION.