For this assignment, you have been asked by your boss to determine the profitabi

Question

For this assignment, you have been asked by your boss to determine the profitability of XYZ Insurance Company. To do so, calculate the trade basis combined ratio. XYZ Insurance Company provided you with the following information:

1.What is the combined ratio?

(HINT: Combined ratio (trade basis) = loss ratio + expense ratio. You'll need to determine the loss and expense ratios)

show your work--which could help you to earn points.

2. What is your opinion of XYZ Insurance company? Profitable? Not Profitable? Why?

3. What are some measures they could take to improve their expense ratio? (bullet point answers are fine)

Incurred Underwriting Expenses $5,000,000 Incurred losses $18,000,000 Loss adjustment expenses $830,000 Net written premiums $22,500,000 Earned premiums $21,500,000

Explanation / Answer

Incurred Underwriting Expenses

Incurred losses

Loss adjustment expenses

Net written premiums

Earned premiums

Combined Ratio = Loss Ratio + Expense Ratio.

Loss Ratio = Incurred losses (including the loss adjustment expense)/Earned premium

= (18000000+830000)/21500000 = 0.88

Expense Ratio = Underwriting expenses/Net written premium

= 5000000/22500000 = 0.22

Combined Ratio = Loss Ratio + Expense Ratio, i.e., 0.88 + 0.22 = 1.10

2. Since Combined Ratio is above 100%, the Combined Ratio is indicating Loss

1. CALCULATION OF COMBINED RATIO

Incurred Underwriting Expenses

Incurred losses

Loss adjustment expenses

Net written premiums

Earned premiums

Combined Ratio = Loss Ratio + Expense Ratio.

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