Which statement about the expense ratio is true?

Which statement about the expense ratio is true?

• A. The expense ratio equals underwriting expenses divided by premiums earned.
• B. The expense ratio equals claims paid divided by premiums written.
• C. The expense ratio equals investment income divided by premiums.
• D. The expense ratio equals reinsurance premiums divided by net premiums.

Answer: (A)

Understanding expense ratio: it shows how efficiently an insurer uses its underwriting funds by comparing underwriting costs to the premiums actually earned during the period. The correct formula is underwriting expenses divided by premiums earned. This denominator—premiums earned—reflects the part of premiums that has been at risk and recognized in the period, aligning costs with the revenue that supports those costs. Using premiums written would misstate the measure because not all written premiums are yet earned, and using claims paid or investment income mixes different financial concepts unrelated to the operating efficiency of underwriting. The statement that defines the expense ratio as underwriting expenses divided by premiums earned is the true one.

Understanding expense ratio: it shows how efficiently an insurer uses its underwriting funds by comparing underwriting costs to the premiums actually earned during the period. The correct formula is underwriting expenses divided by premiums earned. This denominator—premiums earned—reflects the part of premiums that has been at risk and recognized in the period, aligning costs with the revenue that supports those costs. Using premiums written would misstate the measure because not all written premiums are yet earned, and using claims paid or investment income mixes different financial concepts unrelated to the operating efficiency of underwriting. The statement that defines the expense ratio as underwriting expenses divided by premiums earned is the true one.