Explanation:
D is correct. The operating ratio is a broad measure of profitability and describes how net expenses compare to the premiums collected. Both increases in losses (e.g., payouts on policies) and increases in dividends increase such expenses and therefore the operating ratio will increase. P.23 gives an example that illustrates that operating ratio = loss ratio + expense ratio + dividends − investment income. A, B, C are incorrect as per explanation to D above. Learning Objective: Calculate and interpret loss ratio, expense ratio, combined ratio, and operating ratio for a property-casualty insurance company. Reference: Global Association of Risk Professionals, Financial Markets and Products (New York, NY: Pearson, 2023). Chapter 2. Insurance Companies and Pension Plans
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Question 55 of 100: 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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