Combined ratio

The combined ratio measures whether an insurer makes money from underwriting alone. It adds the loss ratio, which is incurred losses and loss adjustment expense divided by earned premium, to the expense ratio, the underwriting and acquisition costs divided by premium. Policyholder dividends, where paid, are added too. On the usual statutory "trade basis," expenses are measured against written premium and losses against earned premium, so the two parts aren't simply divided from one total.

A result under 100 means premium covered claims and expenses. Say a carrier posts a 66% loss and LAE ratio and a 32% expense ratio. Its combined ratio is 98, a two-point underwriting margin before investment income and taxes. At 108, the carrier spent $1.08 for each $1 of premium and must make the difference up from investments.

The number gets misread in three ways. It ignores investment income, so a long-tail line like workers' compensation can run above 100 and still be profitable. Catastrophe years and reserve releases can move it by points without any change in underlying pricing. And it varies by line, so compare carriers and lines like for like. Rising ratios usually precede rate increases, which is why buyers watch them. The guide on the combined ratio: how insurers make (and lose) money on underwriting shows how to read an earnings release, and the loss ratio and combined ratio calculator works out the arithmetic.