If premiums increase by a greater percentage than increases in losses, what happens to the loss ratio?

If premiums increase by a greater percentage than increases in losses, what happens to the loss ratio?

• A. It decreases
• B. It increases
• C. It stays the same
• D. It becomes unpredictable

Answer: (A)

The loss ratio shows how much of the premium is used to pay claims, calculated as losses divided by earned premiums. If premiums rise by a greater percentage than losses, the denominator grows faster than the numerator, causing the ratio to fall. For example, start with losses of 50 and premiums of 100 (loss ratio 0.50). If losses rise 5% to 52.5 but premiums rise 20% to 120, the new loss ratio is 52.5/120 ≈ 0.4375, a decrease. So the loss ratio decreases. It would rise only if losses grew faster than premiums, stay the same if both moved proportionally, or be unpredictable if you didn’t know the relative growth rates.

The loss ratio shows how much of the premium is used to pay claims, calculated as losses divided by earned premiums. If premiums rise by a greater percentage than losses, the denominator grows faster than the numerator, causing the ratio to fall. For example, start with losses of 50 and premiums of 100 (loss ratio 0.50). If losses rise 5% to 52.5 but premiums rise 20% to 120, the new loss ratio is 52.5/120 ≈ 0.4375, a decrease. So the loss ratio decreases. It would rise only if losses grew faster than premiums, stay the same if both moved proportionally, or be unpredictable if you didn’t know the relative growth rates.