insurance

combined ratio

An insurance profitability metric that adds the loss ratio and expense ratio. A combined ratio below 100% indicates underwriting profitability.

Example

“The insurer's 95% combined ratio meant it earned underwriting profit — paying out $0.95 in losses and expenses per $1 in premiums.”

Memory Tip

COMBINED RATIO = losses + expenses as % of premiums. Under 100% = underwriting profit.

Why It Matters

The combined ratio helps you evaluate whether an insurance company is operating efficiently and profitably on its core underwriting business. When shopping for insurance or assessing a company's financial health, a lower combined ratio signals that the insurer is managing claims and expenses well, which can translate to better customer service and claim payouts for policyholders.

Common Misconception

Many people think that any combined ratio below 100% means an insurance company is making huge profits, but they overlook that insurers also earn investment income on premiums collected. A combined ratio of 95% looks good for underwriting alone, but the company might still struggle if investment returns are poor or if they have other operating expenses.

In Practice

Suppose an insurance company collects 100 million dollars in premiums and pays out 60 million dollars in claims (60% loss ratio) while spending 35 million dollars on operating expenses like salaries and marketing (35% expense ratio). Their combined ratio is 95%, which is below 100%, indicating they are underwriting profitably and should have money left over after covering claims and expenses.

Etymology

COMBINED (adding together) RATIO. The COMBINATION of loss ratio and expense ratio.

Common Misspellings

combined-ratiocombined rationcombied ratio

Related Terms

loss ratio expense ratio underwriting

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