Which factor does not contribute to calculating a combined ratio?

Which factor does not contribute to calculating a combined ratio?

• A. Underwriting expenses
• B. Policyholder dividends
• C. Investment income
• D. Incidental income

Answer: (C)

The combined ratio is a key measure used in the insurance industry to assess an insurer's profitability and operational efficiency. It is calculated by summing the loss ratio and the expense ratio. The loss ratio reflects the proportion of losses incurred in relation to earned premiums, while the expense ratio reflects the proportion of operating expenses relative to earned premiums. Investment income is not included in this calculation because the combined ratio specifically focuses on underwriting performance—how well the insurer is managing premiums, losses, and expenses directly related to its insurance operations. Instead, investment income represents earnings generated from the insurer's investment portfolio, which can significantly affect overall profitability but does not factor into the operational efficiency measured by the combined ratio. On the other hand, underwriting expenses and policyholder dividends are integral components that affect the expense ratio, and incidental income can also affect overall revenue but typically does not enter into the combined ratio calculation. Thus, focusing purely on the components of underwriting performance makes investment income the correct answer as it does not contribute to the combined ratio.

The combined ratio is a key measure used in the insurance industry to assess an insurer's profitability and operational efficiency. It is calculated by summing the loss ratio and the expense ratio. The loss ratio reflects the proportion of losses incurred in relation to earned premiums, while the expense ratio reflects the proportion of operating expenses relative to earned premiums.

Investment income is not included in this calculation because the combined ratio specifically focuses on underwriting performance—how well the insurer is managing premiums, losses, and expenses directly related to its insurance operations. Instead, investment income represents earnings generated from the insurer's investment portfolio, which can significantly affect overall profitability but does not factor into the operational efficiency measured by the combined ratio.

On the other hand, underwriting expenses and policyholder dividends are integral components that affect the expense ratio, and incidental income can also affect overall revenue but typically does not enter into the combined ratio calculation. Thus, focusing purely on the components of underwriting performance makes investment income the correct answer as it does not contribute to the combined ratio.