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An insurance company’s projected loss ratio is 73%, its commission payments and dividends to policyholders is...

An insurance company’s projected loss ratio is 73%, its commission payments and dividends to policyholders is 12%, and its yield on investments is 6%. If it has a positive (profitable) operating ratio, what can you say about its loss adjustment expense ratio?

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Answer #1

Yield on Investment should be 6%. So Combined Ratio = 100+6 = 106%.

So, Combined Ratio = Loss Ratio + Loss Adjustment expense Ratio + Dividends to Policy holders.

ie, 106 = 73+ ?? + 12

So, ?? = 21. Therefore,  loss adjustment expense ratio = 21%

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