Combined Ratio
Combined Ratio refers to a key financial metric used in the insurance industry to assess the profitability of an insurance company. It is calculated by adding the loss ratio and the Expense Ratio.
The loss ratio measures the ratio of claims paid to premiums earned, while the Expense Ratio assesses the Operating Expenses in relation to premiums earned. A combined ratio below 100% indicates an underwriting profit, while a ratio above 100% signifies an underwriting loss.
Formula:
Combined Ratio = Loss Ratio + Expense Ratio
Example:
- If an insurance company has a loss ratio of 70% and an Expense Ratio of 25%, the combined ratio would be:
- Combined Ratio = 70% + 25% = 95%
- This indicates an underwriting profit.
Case:
- Consider a company with a loss ratio of 85% and an Expense Ratio of 20%:
- Combined Ratio = 85% + 20% = 105%
- This indicates an underwriting loss, meaning the company is paying out more in claims and expenses than it earns from premiums.