Which statement correctly describes the net investment income ratio?

Which statement correctly describes the net investment income ratio?

• A. Net investment income divided by earned premiums
• B. Net investment income divided by written premiums
• C. Earned premiums divided by net investment income
• D. Investment income minus investment expenses

Answer: (A)

The net investment income ratio shows how much investment income the insurer earns relative to the premiums that have been earned in the period. It is calculated by dividing net investment income by earned premiums. Earned premiums reflect revenue recognized as the policy term passes, matching the time period for which investment returns are generated, so the two measures align. Using written premiums would mix potential future revenue with the current investment results and can distort the picture since not all written premiums are earned in the period. Investment income minus investment expenses, while a dollar amount, is not a ratio and doesn’t relate directly to earned premium, which is why the appropriate form is net investment income divided by earned premiums.

The net investment income ratio shows how much investment income the insurer earns relative to the premiums that have been earned in the period. It is calculated by dividing net investment income by earned premiums. Earned premiums reflect revenue recognized as the policy term passes, matching the time period for which investment returns are generated, so the two measures align.

Using written premiums would mix potential future revenue with the current investment results and can distort the picture since not all written premiums are earned in the period. Investment income minus investment expenses, while a dollar amount, is not a ratio and doesn’t relate directly to earned premium, which is why the appropriate form is net investment income divided by earned premiums.