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. Combined ratio
• B. Operating ratio
• C. Loss ratio
• D. Expense ratio

Answer: (D)

The key idea is how the denominator of each ratio affects its value when earned premiums rise but written premiums stay the same. Loss ratio and the combined/operating measures typically use net premiums earned in the denominator, so if losses stay the same and earned premiums increase, these ratios fall. Expense ratio, in this context, is based on net written premiums rather than net earned premiums. Since net written premiums aren’t changing, the expense ratio remains unchanged even though earned premiums rise. For example, if losses and underwriting expenses stay the same and earned premiums climb, the loss ratio drops, the combined ratio falls, and the operating ratio improves, but the expense ratio stays the same because its denominator (net written premiums) didn’t move. That’s why this item is the one that does not decrease.

The key idea is how the denominator of each ratio affects its value when earned premiums rise but written premiums stay the same. Loss ratio and the combined/operating measures typically use net premiums earned in the denominator, so if losses stay the same and earned premiums increase, these ratios fall.

Expense ratio, in this context, is based on net written premiums rather than net earned premiums. Since net written premiums aren’t changing, the expense ratio remains unchanged even though earned premiums rise. For example, if losses and underwriting expenses stay the same and earned premiums climb, the loss ratio drops, the combined ratio falls, and the operating ratio improves, but the expense ratio stays the same because its denominator (net written premiums) didn’t move. That’s why this item is the one that does not decrease.