Combined Ratio
AdvancedThe combined ratio is a measure of an insurer's underwriting profitability, calculated as the sum of its claims and expenses divided by the premiums it earns, expressed as a percentage.
The combined ratio adds together the loss ratio, claims as a share of premiums, and the expense ratio, operating costs as a share of premiums.
For example, an insurer with a loss ratio of 68% and an expense ratio of 29% has a combined ratio of 97%. For every 100 of premiums, it spends 97 on claims and expenses, making an underwriting profit of 3.
A combined ratio below 100% means the insurer is making a profit from its insurance activities. Above 100% means it is paying out more than it earns in premiums, an underwriting loss.
Insurers also earn investment income from premiums held before claims are paid, so an insurer can still be profitable overall with a combined ratio somewhat above 100%, especially when interest rates are high. However, a consistently high combined ratio is a warning sign. Investors compare combined ratios across insurers and over time, keeping in mind that large catastrophes can push them sharply higher in a single year.
For worked examples and full lessons, visit notesbysara.org.