How this instrument works
The combined ratio is how property-casualty insurers grade their own underwriting, separate from anything they earn investing the premium they hold. It adds incurred losses (claims paid plus reserves set aside for claims still open) to underwriting expenses, then divides that sum by earned premium. A result under 100% means the premium collected covered the claims and the cost of writing the policies, with money left over; a result over 100% means it did not, and the business is relying on something else — usually investment income — to stay profitable overall.
The formula is shaped as two ratios stacked into one: losses over premium is the loss ratio, expenses over premium is the expense ratio, and combined ratio is simply their sum. Splitting the two apart is exactly what an actuary, a reinsurance underwriter, or an equity analyst covering a public insurer does next — a combined ratio of 100% built from a lean 60% loss ratio and a bloated 40% expense ratio points to a very different fix than the reverse split.
What the number leaves out matters as much as what it includes. It ignores investment income entirely, so an insurer with long-tail claims — workers' compensation, general liability, medical malpractice — can run above 100% for years and still profit handsomely on the float, the model Berkshire Hathaway's insurance arm is known for. Loss reserves are also estimates, revised as claims mature, so a reported ratio for a recent accident year can shift materially once the real claims come in.
- Enter the period's claims total in "Incurred losses, $" — paid claims plus reserves held for claims still open.
- Enter "Underwriting expenses, $" — commissions, premium taxes, claims-handling cost, and the administrative overhead of writing the policies.
- Enter "Earned premium, $" — the portion of billed premium that corresponds to coverage already provided in the period, not the full amount invoiced.
- Read "Combined ratio, %": under 100 is an underwriting profit before investment income; over 100 is an underwriting loss.
- Re-run the numbers for a different accident year or line of business to see whether a change in the ratio traces back to losses or to expenses.
Worked example — $650,000 in losses against $1M of premium
Take an insurer that reports $650,000 in incurred losses and $250,000 in underwriting expenses against $1,000,000 of earned premium for the period. Adding losses and expenses gives $900,000. Dividing that by the $1,000,000 premium and multiplying by 100 returns a combined ratio of 90%.
A 90% combined ratio means the insurer kept ten cents of every premium dollar as underwriting profit before investment income ever entered the picture. Change the same $1,000,000 of premium to face $700,000 of losses and $350,000 of expenses instead, and the ratio crosses to 105% — an underwriting loss the company would need investment returns on its float to offset.
Questions
What counts as underwriting expenses in this calculation?
Underwriting expenses cover the cost of acquiring and servicing policies — agent commissions, premium taxes, claims-adjustment overhead, and a share of general administrative cost. They exclude investment expenses and loss payments, which sit in the losses figure instead. Compare ratios only between statements that define this line the same way.
Does a combined ratio under 100% always mean the insurer is profitable?
Not on its own. It means underwriting income was positive before investment returns, taxes, and other non-underwriting items. A company can post a combined ratio under 100% and still report a net loss if investment losses or one-time charges outweigh that underwriting gain, so treat the ratio as one input, not the whole income statement.
Why do some insurers accept a combined ratio above 100%?
Because premium collected today is invested until claims are paid, sometimes years later. Insurers with long-tail lines — workers' compensation or general liability — can run a combined ratio above 100% and still turn an overall profit on the investment income earned on that float.
How is combined ratio different from loss ratio?
Loss ratio is incurred losses divided by earned premium alone — it ignores expenses. Combined ratio adds underwriting expenses into the numerator before dividing by premium, so it captures the full cost of writing and servicing the business, not just claims paid out.
Why use earned premium instead of written premium?
Written premium is the full amount billed when a policy is issued; earned premium is the portion of that amount matching coverage already provided during the period. Matching earned premium against losses and expenses incurred in that same period is what makes the ratio a fair read of underwriting performance.
What is considered a good combined ratio?
It varies by line of business and market cycle — a property insurer after a catastrophe year looks nothing like a stable commercial-auto book. Ratios in the mid-90s generally read as strong underwriting discipline, the high 90s to low 100s as roughly break-even, and anything sustained well above 100% as leaning on investment income to stay profitable.
References
- National Association of Insurance Commissioners — insurance regulation
- Insurance Information Institute — insurer financial strength basics
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.