Combined Ratio

Example

“The insurance company's combined ratio of 95% last quarter meant they earned an underwriting profit of 5 cents on every premium dollar collected.”

Memory Tip

Combined Ratio: under 100 = Company makes money, over 100 = Company loses money (like a test score where 100% is the break-even point).

Why It Matters

Combined ratios help you evaluate insurance company financial health when choosing insurers, as companies with consistently high ratios may raise premiums, reduce coverage, or even become insolvent. Understanding this metric helps you select financially stable insurers that can pay claims and maintain competitive pricing.

Common Misconception

Many people assume that insurance companies always profit from premiums, not realizing that a combined ratio over 100% means the company loses money on underwriting and must rely on investment income to remain profitable. Some also think a very low combined ratio always benefits policyholders, when it might indicate the company is overcharging for coverage.

In Practice

ABC Insurance collected $10 million in premiums last year. They paid $7 million in claims (70% loss ratio) and had $2.5 million in expenses (25% expense ratio). Their combined ratio is 95% (70% + 25%), meaning they earned a 5% underwriting profit of $500,000 before considering investment income on reserves.

Etymology

This actuarial term emerged in the early 20th century as insurance companies needed standardized methods to measure operational efficiency by combining loss costs with operational expenses.

Common Misspellings

Related Terms

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See Also