Combined Ratio
Candlefocus EditorTo calculate the combined ratio, one needs to determine the sum of the insurer’s loss ratio and expense ratio, then subtract that sum from 100. For an insurance that sends out 1 million dollars in premiums, if 200,000 dollars is paid in claims and expenses, then the combined ratio is 120 percent. This would indicate that more money is going out towards claims than is being paid in premiums. Generally, ratios below 100 percent show that the insurance company is making profits, while ratios above 100 percent show loss.
While the combined ratio does not include income from investments, it does consider the figures for all claims and expenses associated with underwriting. It thus provides an accurate evaluation of an insurer’s financial performance, as it excludes extraneous factors that may be influencing the company’s balance sheet.
The combined ratio is a key indicator of an insurance company’s long-term sustainability and profitability. The NAIC tracks the combined ratios of insurers and uses it to monitor the underwriting practices of insurance companies and to determine whether they are pricing their policies correctly. By evaluating the performance of insurers based on their combined ratios, the NAIC can minimize any risk posed to policyholders.
As a result, the combined ratio is an important metric for insurance policyholders, investors, and underwriters alike. Low ratios help to ensure that policyholders are getting the best prices for their policies and investors are seeing returns on their investments, while high and increasing ratios are often a sign that practices need to be revised. For these reasons, understanding and analyzing the combined ratio should be one of the key steps for anyone interested in insurers and insurance markets.