An insurance line has a loss ratio of 72 percent and an expense ratio of 35 percent,and the firm pays 2 percent of premiums to policyholders as dividends. What level of investment yield is needed to make the P&C firm break even?

Question

Quizplus · Accepted Answer

Loss ratio + expense ratio + dividend ratio = 1
Substituting given values,
0.72 + 0.35 + 0.02 = 1.09
So, the investment yield needed to break even is (1 - 1.09) = -0.09 or -9%
Since a negative yield is not possible, we need to find the yield that brings the ratio under 1 or 100%. 
Let x be the required investment yield. 
0.72 + 0.35 + 0.02 + x = 1
x = 0.91
So, the P&C firm needs an investment yield of 9% to break even. 
Therefore, the answer is (C).

An Insurance Line Has a Loss Ratio of 72 Percent