Combined Operating Ratio
In the COR, the Expense Ratio component is not reduced by Other Income in the numerator, right?
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In the COR, the Expense Ratio component is not reduced by Other Income in the numerator, right?
Comments
You are correct that the expense ratio is not reduced by Other Income in the numerator.
But I'm glad you asked that question because I clarified the formula for the expense ratio in the COR as I written it in the RBC article. The is other term in the numerator is aggregate write-ins for U/W deductions. This comes from line 5 under the U/W Income section at the top of the the Income Statement.
Note that the "L" and the "E" in the COR formula (memory trick for COR is LED) are really just lines 2,3,4,5 from the U/W Income section of the Income Statement.
The "D", Dividends to Policyholders, comes from line 17 under the Other Income section of the Income Statement.
Cool, thanks Graham.
Why is the combined ratio in this calculation different than the combined operating ratio in IRIS 5? I can see that in IRIS 5 the policyholder dividends get's lumped into the LR, but why do we want to subtract investment income in one case and not the other?
In RBC wiki, Graham referred to it as "Combined Operating Ratio," but the text actually calls it "current year combined ratio" (page 303). And IRIS 5 is called "Two-year overall operating ratio." So, the two ratios are different.
I changed the description of IRIS 5 in that web-based problem to be consistent with the term the IRIS source text uses. Thx.