The combined ratio: how insurers make (and lose) money on underwriting

The combined ratio is the share of each premium dollar an insurer spends on claims and operating costs. Below 100 the insurer made an underwriting profit; above 100 it paid out more than it collected and has to cover the gap from investment income or surplus. AM Best put the 2025 U.S. property and casualty industry at 95, down from 98 in 2024, and that number is the best single gauge of whether your renewal will be a fight.

The formula

The combined ratio adds up to three pieces, each a percentage of premium. Most are expressed against earned premium, the part of the premium that covers time already elapsed. The expense piece is customarily measured against written premium, the premium booked when policies are issued, which is how Triple-I, the industry's research group, builds its standard calculation.

Loss ratio plus LAE plus expense plus dividends equals the combined ratio. AM Best's analysis guide defines it this way, and the NAIC glossary describes the ratio as the loss and expense ratios added together (AM Best QAR guide; NAIC glossary).

A worked example (hypothetical)

Say an insurer reports, for each $100 of premium: 62 in losses, 9 in claims-handling expense, 25 in commissions and overhead and 0 in dividends. The combined ratio is 96, a four-point underwriting profit.

Now a severe storm season adds seven points of catastrophe losses. The ratio becomes 103, a three-point underwriting loss. If the insurer also earns the equivalent of eight points in investment income on the money it holds between collecting premium and paying claims, its overall result is still positive. AM Best calls that net figure the operating ratio: the combined ratio after dividends minus the net investment income ratio. These numbers are invented; run your own on the loss ratio and combined ratio calculator.

What moves the number

• Catastrophes. Hurricanes, hail and wildfire can move a property insurer's ratio by many points in a single year. Insurers often show the ratio with and without catastrophes.
• Prior-year reserve development. Insurers estimate what claims will ultimately cost. If a year-old estimate proves too low, the shortfall hits this year's ratio. AM Best's re-estimate of year-end 2024 industry reserves still showed a deficiency of about $9 billion, which is why careful readers look at accident-year results separately; see loss reserves and reserve development: why they matter to buyers.
• Rate versus claim cost. Combined ratios improve when price rises faster than claim severity. Social inflation, repair costs and medical costs push the other way; see nuclear verdicts and social inflation: why liability costs keep rising.
• Mix. An insurer weighted to workers' comp and one weighted to commercial auto will not post the same ratio in the same year.
• Growth. New business carries heavy acquisition costs up front, and fast-growing books can look better than they are until claims develop.

2025 combined ratios by line

AM Best reported the following for calendar year 2025, as covered by Claims Journal on Feb. 25, 2026, alongside the NCCI figure for workers' compensation:

The pattern explains your premiums. Private workers' comp has run well under 100, and carriers have competed on price for it. Auto and liability run above 100, so carriers keep pushing rate there. For the market view, see hard and soft insurance markets: what the cycle means for buyers and commercial insurance pricing trends: what the 2026 indexes show.

What the combined ratio does not show

1. Investment income. Liability and workers' comp claims can take years to pay, and the insurer earns interest in the meantime. A long-tail insurer can run slightly above 100 and still make money overall. A short-tail property insurer gets less help, because it pays claims sooner.
2. Reserve adequacy. A good ratio built on reserves that are too low is borrowed from future years.
3. Reinsurance. The ratio can be gross or net of reinsurance. Ceding premium and recovering losses changes both sides.
4. Accounting basis. Regulators use statutory accounting. Public companies report under GAAP, where acquisition costs are deferred and the expense ratio is measured against earned premium, and companies also publish adjusted measures. Two insurers' ratios are comparable only if you know which basis each uses.
5. Your own account. An industry ratio for a line says nothing about whether your risk is priced fairly. Your loss history, class and rating basis still drive your premium; see why your business insurance premium went up.

How to read one in a report

1. Find the basis (statutory, GAAP or company-adjusted) and the period.
2. Split out catastrophe losses and prior-year reserve development to see the underlying ratio.
3. Check the segment: commercial lines versus personal, and the line that is hurting.
4. Compare premium growth and the expense ratio. A falling expense ratio with rising premium can reflect scale; a falling ratio with falling premium may reflect shrinking.
5. Then read the rest of the release; how to read an insurance company's earnings report walks through it.

Key takeaways

• The combined ratio is loss and LAE plus expenses (plus dividends) as a share of premium; under 100 is an underwriting profit.
• AM Best put the industry at 95 for 2025 and forecasts 96.9 for 2026, with commercial lines at 95.8; commercial auto (103.5) and liability (106 to 108) ran above 100.
• Catastrophes and reserve changes can swing the ratio sharply, so look at the underlying figure.
• A ratio above 100 is not automatically a loss, because investment income on float offsets some of it, especially in long-tail lines.
• Line-level ratios show where carriers will push rate or ease it, not what your policy should cost.