Explanation:
Correct Answer: D
Explanation: The operating ratio is a broad measure of profitability that describes how net expenses compare to the premiums collected. The operating ratio formula is:
Operating ratio = Loss ratio + Expense ratio + Dividends - Investment income
In this scenario:
Both increases in losses (payouts on policies) and increases in dividends increase expenses, which directly increase the operating ratio. Since both components increase by 1%, the total impact on the operating ratio is an increase of 2%.
Why other options are incorrect:
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The CFO of a property and casualty insurance company is stress testing the impact of different management decisions on the company's operating results and its operating ratio for the coming year. In one of the tested scenarios, the loss ratio increases by 1% and the company pays an additional 1% of its premiums received as dividends. Which of the following correctly describes the impact of this scenario on the company's operating ratio?
A
The operating ratio will decrease by 1%.
B
The operating ratio will decrease by 2%.
C
The operating ratio will increase by 1%.
D
The operating ratio will increase by 2%.
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