Casualty Actuarial Society (CAS) Practice Exam

What does the combined ratio primarily measure in insurance?

1. The overall profitability of the insurer

2. The effectiveness of investment activities

3. The success of underwriting activities

4. The overall market competitiveness

The correct answer is: The success of underwriting activities

The combined ratio primarily measures the success of underwriting activities in an insurance company. It is calculated by adding the loss ratio to the expense ratio. The loss ratio reflects the ratio of claims paid to premiums earned, highlighting how well the insurer is managing risks and claims related to underwriting. The expense ratio shows the proportion of premium income that is consumed by operating expenses. When the combined ratio is less than 100%, it indicates that the insurer is making a profit from its underwriting operations, meaning its premiums exceed the losses and expenses incurred. A combined ratio greater than 100% signifies an underwriting loss. Therefore, this metric is a direct reflection of how effectively an insurer is managing underwriting risks and ensuring that its premium pricing is adequate to cover potential claims and expenses. The other options, while relevant to overall insurance operations, do not directly pertain to the specific focus of the combined ratio. Profitability, investment effectiveness, and market competitiveness encompass broader aspects of an insurer's overall performance, which may include underwriting results but are not solely defined by them.