A quick and friendly guide to understanding the combined ratio and what it reveals about an insurance company’s profitability.
A combined ratio measures how profitable an insurance company is by adding together its loss ratio and expense ratio. It helps show whether the company is earning more from premiums than it is spending on claims and operating costs.
Understanding the Combined Ratio
The combined ratio is one of the most important financial indicators in the insurance world. It tells you, in a single number, how efficiently an insurer is running its business. The ratio compares how much money the insurer pays out (in claims and expenses) to how much it earns from premiums.
The formula is simple:
Combined Ratio = Loss Ratio + Expense Ratio
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The loss ratio shows how much an insurer pays in claims.
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The expense ratio shows what it spends to operate the business—things like salaries, marketing, and administrative costs.
When you put these two together, you get a clear picture of the insurer’s core profitability.
What the Combined Ratio Tells You
The combined ratio is usually expressed as a percentage. Here’s how to interpret it:
Below 100%: Profitable Operations
A combined ratio under 100% means the insurer is earning more in premiums than it spends on claims and expenses.
For example, a combined ratio of 90% means the insurer keeps 10% of premiums as underwriting profit.
Exactly 100%: Break-Even
At 100%, the insurer is essentially breaking even in its underwriting business. It is paying out the same amount in claims and expenses as it receives in premiums.
Above 100%: Underwriting Loss
A combined ratio over 100% means the insurer is paying out more than it earns.
For example, a 105% combined ratio shows a 5% loss from underwriting operations.
Insurance companies can still be profitable overall even if the combined ratio is above 100%, because they also earn investment income. But the combined ratio focuses only on the underwriting side of the business.
Why the Combined Ratio Matters
The combined ratio is a key metric because it helps you understand the health and stability of an insurance company. It answers one important question: Is the insurer managing risk effectively?
Here’s why it matters:
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Shows financial strength: Consistently low combined ratios mean the company is operating efficiently and managing claims well.
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Reflects industry trends: In years with major disasters—like hurricanes or wildfires—combined ratios can rise across the industry.
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Helps compare insurers: Investors, regulators, and analysts often use the combined ratio to see which companies are performing better.
A Simple Example
Imagine an insurance company collects $100 million in premiums in a year.
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It pays $60 million in claims → loss ratio = 60%.
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It spends $25 million on operating expenses → expense ratio = 25%.
Now calculate the combined ratio:
60% + 25% = 85%
An 85% combined ratio means the insurer keeps 15% of premiums as underwriting profit. This would be considered strong performance.
If the totals were reversed—for example, if claims spike to $90 million—the combined ratio would jump to 115%, showing a significant underwriting loss.
What Affects the Combined Ratio?
Several real-world factors can cause the combined ratio to rise or fall:
Natural disasters
Events like floods or earthquakes can increase claims dramatically.
Economic shifts
Higher repair costs or medical expenses can drive up claim payments.
Operational efficiency
If a company manages expenses well, it keeps its expense ratio and combined ratio lower.
Risk selection
Insurers that choose customers carefully often experience fewer losses.
Final Thoughts
The combined ratio is a simple yet powerful way to measure the profitability of an insurance company’s underwriting activities. By adding the loss and expense ratios, it gives a clear picture of how well the insurer is balancing risk, expenses, and premium income. For anyone interested in understanding insurance performance—whether you’re a policyholder or an investor—the combined ratio is an essential number worth paying attention to.
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