Combined ratio
Sector Deep DivesClaims plus expenses as a percentage of earned premium at a general insurer, with anything below 100 meaning underwriting was profitable on its own.
Also written: loss ratio plus expense ratio
The combined ratio adds the loss ratio, claims incurred over earned premium, to the expense ratio, acquisition and administration costs over earned premium. Below 100 the insurer made a profit from underwriting alone. Above 100 it did not, and needed the return on its investments to be profitable overall.
That last clause is what candidates get wrong. A combined ratio above 100 is not the same as a loss. An insurer collects premiums before it pays claims, invests the difference, and can run an underwriting loss for years if the investment return more than covers it.
The relationship runs the other way too. When investment yields are low the underwriting has to carry the whole result, which is one of the forces that hardens premium rates and turns the pricing cycle. Underwriting discipline and the rate environment are not independent of each other, which is why an insurer's combined ratio target moves with yields.
Two cautions before quoting one. Conventions differ, and some insurers compute the expense ratio on written rather than earned premium, so printed ratios are not always comparable across companies. And a ratio flattered by releases of prior year reserves says less about current underwriting than the current accident year ratio does.
Worked example
Illustrative: earned premium of 1,000, a loss ratio of 70% and an expense ratio of 33% give a combined ratio of 103.
Claims of 700 and expenses of 330 exceed premium by 30, so underwriting lost 30.
If the invested float earns 50, the insurer still reports 20 before tax. The combined ratio described the underwriting. It did not describe the profit.