Homework #3 - Chapter 7

Application question from the book

• Chapter 7: #4 on page 146.

Also, answer the following questions:
Suppose last year, an auto insurer wrote 2,000 policies, each with a premium of $1,500.  (Assume that all of the policies were written on January 1 so that earned premium is equal to written premium).  The company expected a loss ratio of 65%.  At the end of the year, the company estimates:

• actual incurred losses and LAE were $2,100,000
• underwriting expenses were $1,000,000
• net investment income was $150,000.

1. Based on the actual experience of the company, did the company earn an underwriting profit?  Support your answer by computing the actual loss ratio, expense ratio, combined ratio, and operating ratio.
2. Using the EXPECTED loss ratio of 65%, what was the (expected) pure premium (per policy)?
3. Based on the actual loss experience last year, what is the indicated rate change using the loss ratio method?