Updated on October 4, 2023
The combined ratio is an important financial metric used in the insurance industry, particularly in property and casualty insurance, to assess the overall financial health and profitability of an insurance company. The meaning of this term is explained here.
What is a combined ratio?
The combined ratio is a crucial financial metric used in the insurance industry, expressed as a percentage. It measures the efficiency of an insurance company’s operations and determines whether it is making an underwriting profit or experiencing losses. This ratio combines two components, namely the loss ratio and the expense ratio, to provide a comprehensive view of the company’s financial performance. A combined ratio below 100% indicates profitability, while a ratio above 100% suggests underwriting losses.
How is the combined ratio calculated?
The loss ratio in insurance signifies the portion of premiums that an insurer pays out as claims, while the expense ratio represents the part of premiums used for operational expenses. To calculate the combined ratio, simply add the loss ratio and the expense ratio. This combined ratio, expressed as a percentage, offers a comprehensive view of an insurance company’s financial performance. For instance, if the loss ratio is 60% and the expense ratio is 20%, the combined ratio is 80%. A combined ratio below 100% indicates profitability, while a ratio above 100% suggests underwriting losses.
How is the combined ratio interpreted?
Lower combined ratios are preferable for insurance companies as they indicate efficient operations.
A combined ratio below 100% signifies an underwriting profit, where premiums exceed claims and expenses.
Conversely, a combined ratio above 100% indicates an underwriting loss, where claims and expenses exceed premium income.