Glossary
Combined Ratio
The combined ratio is an insurance profitability measure equal to the sum of the loss ratio and the expense ratio. It shows how much an insurer pays in claims and underwriting expenses for each dollar of premium. A combined ratio below 100% indicates an underwriting profit; above 100% indicates an underwriting loss.
Formula
Example
An insurer earns $100,000,000 of premium. Incurred losses and loss adjustment expenses total $65,000,000, a 65% loss ratio, and underwriting expenses such as commissions and overhead total $30,000,000, a 30% expense ratio. The combined ratio is 95%, meaning the insurer earned an underwriting profit of $5,000,000 before investment income. A 105% combined ratio would mean a $5,000,000 underwriting loss.
How it is used in underwriting
Insurance underwriters, actuaries, analysts and reinsurers use the combined ratio to evaluate whether a book of business is priced adequately. Underwriters set rates so that expected losses plus expenses leave a margin, and they monitor actual combined ratios by line, region and distribution channel to identify segments that need rate increases, tighter terms or exit. Reinsurers use cedents' combined ratios to assess the quality of the business they are assuming. Lenders and investors in insurance companies watch the trend in the combined ratio as a key indicator of underwriting discipline.
The ratio has important nuances. Losses include estimates of claims incurred but not yet reported, so a combined ratio can change later as reserves develop. Catastrophe losses and prior year reserve releases or additions can distort a single year, so analysts often look at an accident year or ex-catastrophe ratio. Long-tail lines such as liability can operate above 100% and still be profitable because insurers invest premiums for years before paying claims, while short-tail property lines have less investment income to rely on. Expense ratios may be calculated on written or earned premium, depending on convention.
Typical benchmarks
A combined ratio below 100% indicates an underwriting profit and above 100% an underwriting loss; acceptable levels vary by line of business, especially between short-tail and long-tail lines.
Frequently asked questions
What is a good combined ratio?
Any combined ratio below 100% means the insurer made an underwriting profit. How far below depends on the line of business. Short-tail property lines generally need lower combined ratios to be attractive, while long-tail casualty lines can be profitable at or slightly above 100% because of investment income on reserves.
What is the difference between the loss ratio and the combined ratio?
The loss ratio measures claims and claim adjustment expenses relative to earned premium. The combined ratio adds the expense ratio, which covers commissions, salaries and other underwriting costs. The combined ratio therefore gives a fuller picture of whether premiums cover all costs of the insurance operation.
Can an insurer be profitable with a combined ratio over 100%?
Yes. An insurer with a combined ratio above 100% loses money on underwriting but can still earn an overall profit if investment income on premiums held before claims are paid exceeds the underwriting loss. This is more common in long-tail lines where claims are paid years after premiums are collected.
Related terms
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