Alberta General Insurance Level 1 Practice Exam

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What effect does an insurer’s combined ratio have on its profitability?

  1. No effect, as it relates only to market share

  2. Increases profitability if above 100%

  3. Decreases profitability if above 100%

  4. Directly correlates to stock prices

The correct answer is: Decreases profitability if above 100%

An insurer's combined ratio indicates the total expenses incurred for every dollar earned in premiums. A combined ratio above 100% means that an insurer is paying out more in claims and expenses than it is earning in premiums. This leads to a decrease in profitability as the insurer is operating at a loss. Option A is incorrect because the combined ratio does have an effect on profitability. Option B is incorrect because a combined ratio above 100% does not increase profitability, but rather decreases it. Option D is incorrect because the combined ratio does not directly correlate to stock prices, but rather indicates the financial health and profitability of the insurance company. So, the correct answer is C- Decreases profitability if above 100%.

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