The combined ratio adds an insurer's loss ratio and expense ratio together. A combined ratio below 100% means the insurer is generating an underwriting profit before investment income; above 100% means claims and expenses exceed premium collected.
Why It Matters
Combined ratio is the headline number analysts and rating agencies use to judge whether an insurer's core underwriting business — as opposed to its investment portfolio — is sound. A carrier can run a combined ratio above 100% and still be profitable overall if investment returns cover the gap, but a persistently high combined ratio signals underwriting discipline problems that investment income can't fix forever.
How It Works in Practice
- 1Loss ratio: incurred losses ÷ earned premium
- 2Expense ratio: underwriting expenses (commissions, overhead, acquisition costs) ÷ written premium
- 3Combined ratio = loss ratio + expense ratio
- 4Some insurers report an 'accident year' combined ratio, excluding the effect of reserve development from prior years, to isolate current-period underwriting performance
Common Pitfalls
A combined ratio just under 100% can still represent a weak business if investment yields have compressed — the metric alone doesn't capture total profitability
Reserve releases (favorable development from prior accident years) can flatter the current period's reported combined ratio without reflecting current underwriting quality
Combined ratios vary enormously by line — a 98% is strong for commercial auto but would be considered weak for many property lines in a normal cat year