Which statement about the expense ratio is true?

Which statement about the expense ratio is true?

• A. It compares incurred expenses to earned premiums.
• B. It compares incurred expenses to written premiums.
• C. It compares written premiums to earned premiums.
• D. It compares insured's claims paid to premiums.

Answer: (B)

The expense ratio measures underwriting costs as a percent of the premiums the insurer has written. It uses underwriting expenses incurred in the period divided by premiums written (often net premiums written) because those costs are tied to the act of underwriting and obtaining the premium, not to the portion of premium that has already been earned over time. If you compared expenses to earned premiums, you’d mix timing of revenue with costs, which doesn’t accurately reflect underwriting efficiency. The other options don’t describe this relationship: one references claims or paid losses, which belong to the loss ratio, not the expense ratio.

The expense ratio measures underwriting costs as a percent of the premiums the insurer has written. It uses underwriting expenses incurred in the period divided by premiums written (often net premiums written) because those costs are tied to the act of underwriting and obtaining the premium, not to the portion of premium that has already been earned over time. If you compared expenses to earned premiums, you’d mix timing of revenue with costs, which doesn’t accurately reflect underwriting efficiency. The other options don’t describe this relationship: one references claims or paid losses, which belong to the loss ratio, not the expense ratio.