Question

An insurance company collected $45.0 million in premiums and disbursed $47
million in losses. Loss adjustment expenses amounted to $3.0 million. The firm is
profitable

if dividends paid to policyholders is $6 million and income generated on investments is
$8 million.
if dividends paid to policyholders is $4 million and income generated on investments is
$2 million.
if dividends paid to policyholders is $7 million and income generated on investments is
$4 million.
if dividends paid to policyholders is $17 million and income generated on investments is
$21 million.
if dividends paid to policyholders is $17 million and income generated on investments is
$23 million.

Answer 1

Premium collected = $45 m

Amount distributed in losses = $47 m

Loss adjustment expenses = $3m

Net profitability = Premium collected - Amount distributed in losses - Loss adjustment expenses - Dividends paid + Total income from investments

Case a:

Net profitability = $45m-$47m-$3m-$6m+$8m

= $-3m (negative)

Case b:

Net profitability = $45m-$47m-$3m-$4m+$2m

= $-7m (negative)

Case c:

Net profitability = $45m-$47m-$3m-$7m+$4m

= $-8m (negative)

Case d:

Net profitability = $45m-$47m-$3m-$17m+$21m

= $-1m (negative)

Case e:

Net profitability = $45m-$47m-$3m-$17m+$23m

= $1m (positive)

Hence, option (E) is correct.

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