Combined Ratio Calculator

Understanding Combined Ratio in Insurance Underwriting

The combined ratio is a core financial metric used in the insurance industry to measure underwriting profitability. It evaluates whether an insurance provider is generating a profit or experiencing a loss from its daily insurance operations before factoring in investment returns.

Formula for Combined Ratio

The combined ratio combines two key components: the loss ratio and the expense ratio.

$$\text{Combined Ratio} = \text{Loss Ratio} + \text{Expense Ratio}$$

Where individual components are calculated as:

$$\text{Loss Ratio} = \frac{\text{Incurred Losses} + \text{Loss Adjustment Expenses (LAE)}}{\text{Net Earned Premium}} \times 100$$

$$\text{Expense Ratio} = \frac{\text{Other Underwriting Expenses}}{\text{Net Earned Premium}} \times 100$$

Interpreting Combined Ratio Results

• Below 100%: Indicates underwriting profit. For example, a combined ratio of 92% means the insurer spends 92 cents in claims and expenses for every dollar of earned premium, leaving an 8% profit margin.
• Above 100%: Indicates an underwriting loss. A ratio of 105% means claims and operating costs exceed collected premiums by 5%.
• Exactly 100%: Represents the break-even point in underwriting operations.