A decrease in incurred losses will generally cause a decrease in all of the following except

A decrease in incurred losses will generally cause a decrease in all of the following except

• A. Expense ratio
• B. Loss ratio
• C. Net investment income ratio
• D. Combined ratio

Answer: (A)

Underwriting performance ratios respond to changes in losses in specific ways. When incurred losses fall, the loss ratio—calculated as incurred losses divided by earned premiums—tends to drop because the numerator is smaller while the premium base stays about the same. The combined ratio, which adds the expense ratio to the loss ratio, also tends to decrease since the loss portion has shrunk (assuming expenses don’t rise to offset it). The expense ratio, however, is based on underwriting expenses relative to premiums earned. It is not directly driven by how much is paid out in claims, so a decrease in incurred losses does not guarantee a lower expense ratio. Net investment income ratio is tied more to investment performance and the amount of funds available to invest than to underwriting losses, so its movement isn’t directly tied to changes in incurred losses. Therefore, the item that would not necessarily decrease is the expense ratio.

Underwriting performance ratios respond to changes in losses in specific ways. When incurred losses fall, the loss ratio—calculated as incurred losses divided by earned premiums—tends to drop because the numerator is smaller while the premium base stays about the same. The combined ratio, which adds the expense ratio to the loss ratio, also tends to decrease since the loss portion has shrunk (assuming expenses don’t rise to offset it).

The expense ratio, however, is based on underwriting expenses relative to premiums earned. It is not directly driven by how much is paid out in claims, so a decrease in incurred losses does not guarantee a lower expense ratio. Net investment income ratio is tied more to investment performance and the amount of funds available to invest than to underwriting losses, so its movement isn’t directly tied to changes in incurred losses. Therefore, the item that would not necessarily decrease is the expense ratio.