Combined Ratio

A measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.

The combined ratio is comprised of the claims ratio and the expense ratio. The claims ratio is claims owed as a percentage of revenue earned from premiums. The expense ratio is operating costs as a percentage of revenue earned from premiums. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium.

Calculated as:

Even if the combined ratio is above of 100%, a company can potentially still make a profit, because the ratio does not include the income received from investments.

Many insurance companies believe that this is the best way to measure the success of a company because it does not include investment income and therefore only includes profit that is earned through efficient management.