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With this combined ratio calculator, we are here to help you calculate an insurance company's combined ratio. The combined ratio is the best overall metric to analyze an insurance company, as it tells you its profitability.

We wrote this article to help you understand what combined ratio is and how to calculate the combined ratio. We will also demonstrate some combined ratio formula examples to aid you in understanding the concept. Ready? Let's start by discussing the combined ratio definition.

🙋 Interested in other measures of profitability? How about our net profit margin calculator?

What does the combined ratio mean in insurance? The combined ratio definition

The combined ratio is a metric that can analyze the overall operation of an insurance company. Specifically, it tells you how efficient the whole value chain of an insurance company is. Hence, we can also understand it as the best metric to analyze the profitability of the insurance company. Profit decides whether a company stays afloat — so analyzing a company's profitability is a crucial process.

An insurance company has two main operations to acquire new policies and to manage its current policies. Compared to the loss ratio, the combined ratio considers the cost to acquire new policies, whereas the loss ratio only considers the operation of maintaining its current policies.

Now, it's time to talk about the combined ratio formula and its calculation.

How to calculate the combined ratio?

To demonstrate an example for combined ratio, let's take the insurance company below as an example:

  • Total premiums: $12,000,000;
  • Claim loss: $4,500,000;
  • Loss adjustments: $2,300,000; and
  • Underwriting expense: $1,200,000.

These are the 4 steps you need to follow to calculate the combined ratio:

  1. Determine the total premiums

The premiums the insurance company earned is defined as the total premiums, or premiums. The premiums the insurance company in our example is $12,000,000.

  1. Evaluate the loss expense

The loss expense is defined as the sum of claim loss and loss adjustments. claims loss is the amount of money the insurance company pays out as claims to its policies. loss adjustments is the money spent to validate the claims. The formula of loss expense is as follow:

loss expense = claim loss + loss adjustments

For this example, the loss expense of the insurance company is $4,500,000 + $2,300,000 = $6,800,000.

  1. Determine the underwriting expense

The underwriting expense is the expense the insurance company incurred to acquire new policies. For our example, the underwriting expense is $1,200,000.

  1. Calculate the combined ratio insurance

The last step is to calculate the combined ratio using the combined ratio formula. The formula for combined ratio in insurance is shown as follows:

combined ratio = (loss expense + underwriting expense) / premiums

Hence, the combined ratio of the insurance company is ($6,800,000 + $1,200,000) / $12,000,000 = 66.67%.

What is the difference between the combined ratio and loss ratio?

The loss ratio only takes into account the operation of the insurance company in estimating their policies' risk profiles and claims. In other words, the loss ratio tells you how effectively the insurance company is managing its current policies. On the other hand, the combined ratio also considers both risk profiling and the underwriting process. This means that the combined ratio considers both the operation regarding the current policies and the operation of acquiring new policies.

All in all, the combined ratio is often known as the best metric to analyze an insurance company as it considers the entire value chain of the business. In contrast, the loss ratio only looks at a part of it.

How do we interpret the combined ratio?

Now that we understand the calculation, it's time to discuss what does the combined ratio mean in insurance.

Interpreting the combined ratio is not complex at all. In fact, there are only 3 points that you should focus on:

  • If the combined ratio is lower than 100%, the insurance company's premiums earned is more than its claim losses and underwriting expenses. This is an indication that, overall, the insurance company is making a profit.
  • If the combined ratio is equal to 100%, the premiums the insurance company earned is just enough to cover its claims losses and underwriting expenses claims and expenses. Hence, it is breaking even through its operation.
  • If the combined ratio is larger than 100%, it means that the insurance company's total claims underwriting expenses are more than the premiums it earns. This is an indication that the insurance company's operation is inefficient, and it is making a loss overall.


Can combined ratio be used to analyse companies other than insurance companies?

The combined ratio is constructed specifically to analyze the operation of an insurance company. Hence, it would not be suitable to use this metric to analyze other companies.

What is an acceptable combined ratio?

There is no hard rule on what would be an acceptable loss ratio. It entirely depends on the industry the insurance company functions in. However, a combined ratio larger than 1 indicates that the insurance company is making a loss, which is obviously unacceptable.

Can combined ratio be negative?

The short answer is no. Since the claims, loss adjustments, expenses, and premiums will never be negative, the combined ratio cannot be negative.

What are the main reasons for a high combined ratio?

There are several reasons for a high combined ratio. These reasons include misinterpreting risk profiles of clients and a low customer retention ratio.

Wei Bin Loo
Loss expense
Claim loss
Loss adjustments
Loss expense
Combined ratio
Underwriting expense
Combined ratio
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