Texas General Lines — Property and CasualtyGeneral InsuranceEasy
An insurance company is evaluating its financial performance over the past year. They report total incurred losses of $75 million and earned premiums of $125 million. What is the company's loss ratio for the year?
- A0.40
- B0.33
- C0.60
- D1.67
Show answer & explanationAnswer & explanation
Correct answer: C. 0.60
The loss ratio is calculated by dividing incurred losses by earned premiums. In this case, $75 million (incurred losses) / $125 million (earned premiums) = 0.60.
Why the other options are wrong
- A. Incorrect calculation; this would result from (($125M - $75M) / $125M).
- B. Incorrect calculation; this would result from ($75M / ($75M + $125M)).
- D. Incorrect calculation; this would result from ($125M / $75M).
Loss Ratio
A profitability ratio that compares an insurer's total incurred losses and loss adjustment expenses to its total earned premiums.
- Formula: (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums.
- Indicates underwriting profitability.
- A lower ratio is generally more favorable for the insurer.
Memory trick: Ratios reveal if the insurance ship is sinking or sailing.