A decrease in incurred losses will typically reduce all of the following except which item?

A decrease in incurred losses will typically reduce all of the following except which item?

• A. expense ratio
• B. loss ratio
• C. loss adjustment expenses
• D. combined ratio

Answer: (A)

When incurred losses decline, measures tied to the loss experience respond directly. The loss ratio uses incurred losses as its numerator, so a drop in incurred losses reduces the loss ratio. Loss adjustment expenses are part of the incurred losses, so they tend to fall as overall incurred losses fall. The combined ratio is the sum of the loss ratio and the expense ratio, so a lower loss ratio drags the combined ratio down as well. The expense ratio, however, is based on underwriting expenses relative to premiums earned and does not depend on the level of losses. Therefore, a decrease in incurred losses does not typically reduce the expense ratio.

When incurred losses decline, measures tied to the loss experience respond directly. The loss ratio uses incurred losses as its numerator, so a drop in incurred losses reduces the loss ratio. Loss adjustment expenses are part of the incurred losses, so they tend to fall as overall incurred losses fall. The combined ratio is the sum of the loss ratio and the expense ratio, so a lower loss ratio drags the combined ratio down as well. The expense ratio, however, is based on underwriting expenses relative to premiums earned and does not depend on the level of losses. Therefore, a decrease in incurred losses does not typically reduce the expense ratio.