Combined Ratio = Loss Ratio + Expense Ratio If a company has a combined ratio of 90%, 90% of its premiums go to paying for insured losses and expenses. That means 10% of the premiums are profit. This ratio shows if the insurer earned a profit from underwriting, or if it’s spending more in expenses than it’s receiving in premiums. It is a number that can tell you quickly whether or not an insurance company is making money on underwriting. When looking at an insurance company’s financial records, the combined ratio is also known as the composite ratio, or the statutory ratio. The smaller this number, the better. A combined ratio of less than 100 means the insurance company has an underwriting profit.
Alternate name: composite ratio, statutory ratio
How Does a Combined Ratio Work?
To find the combined ratio, you’ll first need to calculate the company’s loss and expense ratios. You can get the loss ratio by dividing loss adjustments by premiums earned. This number shows you what percentage of payouts are settled. Loss Ratio = Losses Incurred / Premiums Earned To find the expense ratio, divide the underwriting expenses of an insurance company by the net premiums it earned. This shows you the percentage of the premiums going toward operating expenses. Expenses Ratio = Underwriting Expenses / Premiums Earned Once you have these two ratios, add them together to find the combined ratio. If this number is under 100%, the insurer is making a profit in underwriting. If it’s over 100%, the company is not making a profit in that business area.
An Example of Combined Ratio
Let’s say QRS insurance company has a loss ratio of 73.4%, and an expense ratio of 21.2%. The combined ratio for this insurer is 94.6%. This means its underwriting profit is 5.4% (100% - 94.6%).
What Does a Combined Ratio Tell You?
The combined ratio tells you a lot about an insurance company’s financial status at a glance. The lower the number is, the more profitable the company is. A combined ratio under 100% indicates the company is profitable, while a combined ratio over 100% means the insurer is spending more in expenses than it takes in in premiums. With a combined ratio of more than 100%, an insurance company could benefit from raising its prices or implementing stronger risk-management policies to reduce losses. The insurer could also increase profitability by lowering its operating expenses, improving its digital channels, raising customer retention rates, and more.
