An increase in earned premiums with no change in written premiums or any other financial figures will generally cause a decrease in all of the following, except

An increase in earned premiums with no change in written premiums or any other financial figures will generally cause a decrease in all of the following, except

• A. Gross profit margin
• B. Expense ratio
• C. Combined ratio
• D. Operating ratio

Answer: (B)

When earned premiums rise while written premiums and all other figures stay the same, everything that is tied to the earned-premiums base will shift in a way that lowers those ratios. Losses and underwriting expenses stay fixed, so ratios that divide those fixed costs by a larger earned-premiums base tend to fall (loss ratio and expense ratio, if the expense ratio uses net premiums earned, would drop; the combined ratio and the operating ratio also fall for the same reason because the denominator grows while the numerator stays constant). The gross profit margin, which resembles earned premium minus the fixed costs divided by earned premium, would increase because you’re earning more premium against the same cost structure, improving profitability per dollar of earned premium. The exception here is the expense ratio if it is defined using written premiums in the denominator. Since written premiums are unchanged, that particular ratio would not move even though earned premiums rise, making it the one that doesn’t decrease.

When earned premiums rise while written premiums and all other figures stay the same, everything that is tied to the earned-premiums base will shift in a way that lowers those ratios. Losses and underwriting expenses stay fixed, so ratios that divide those fixed costs by a larger earned-premiums base tend to fall (loss ratio and expense ratio, if the expense ratio uses net premiums earned, would drop; the combined ratio and the operating ratio also fall for the same reason because the denominator grows while the numerator stays constant). The gross profit margin, which resembles earned premium minus the fixed costs divided by earned premium, would increase because you’re earning more premium against the same cost structure, improving profitability per dollar of earned premium.

The exception here is the expense ratio if it is defined using written premiums in the denominator. Since written premiums are unchanged, that particular ratio would not move even though earned premiums rise, making it the one that doesn’t decrease.