Economics & ClaimsCore

Combined Ratio

Q: What two components make up the combined ratio?

Loss ratio and expense ratio — The combined ratio is simply the loss ratio plus the expense ratio, both measured as a percentage of premium.

Loss ratio plus expense ratio

The sum of the loss ratio and the expense ratio — the single most common shorthand for whether an underwriting book is profitable before investment income.

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Definition

The combined ratio adds an account's loss ratio (losses divided by premium) to its expense ratio (underwriting expenses divided by premium), producing one number that summarises underwriting profitability. A combined ratio below 100% means the account made an underwriting profit before any investment income is even considered; above 100% means the underwriting result itself was a loss, though investment income can still make the business profitable overall. It is the fastest single signal reinsurers and cedents alike use to judge underwriting discipline.

A combined ratio below 100% means an underwriting profit was made before any investment income is factored in at all.
Above 100% does not automatically mean an overall loss for the company, since investment income can still offset it — but it does mean the underwriting itself lost money.
Reinsurers watch a cedent's combined ratio trend over time closely, since it is the fastest single indicator of underwriting discipline across an entire account.

Worked example

An account with a 62% loss ratio and a 30% expense ratio has a 92% combined ratio, meaning it earned an 8-cent underwriting profit on every premium dollar, before any investment income is added.

Scenario · figures in USD

Two years, two very different combined ratios

A cedent's casualty account has a strong year followed by a weaker one.

Year 1 loss ratio	58%
Year 1 expense ratio	32%
Year 1 combined ratio	90% — underwriting profit
Year 2 loss ratio	78%
Year 2 expense ratio	31%
Year 2 combined ratio	109% — underwriting loss

So whatThe swing from 90% to 109% combined ratio flags a genuine deterioration in underwriting results, well before it would show up in any single loss figure alone.

Check your understanding

What two components make up the combined ratio?

Loss ratio and expense ratio. The combined ratio is simply the loss ratio plus the expense ratio, both measured as a percentage of premium.

What does a combined ratio above 100% indicate?

The underwriting result itself was a loss, though investment income could still offset it. A combined ratio above 100% means underwriting itself lost money, but the company as a whole might still be profitable once investment income is added.

Word problem

An account has $20M of premium, $13.5M of incurred losses, and $6M of underwriting expenses. What is its combined ratio, and did it produce an underwriting profit or loss?

Show a hint

Calculate the loss ratio and expense ratio separately as percentages of premium, then add them together.

Reveal the worked answer

Loss ratio: $13.5M / $20M = 67.5%.
Expense ratio: $6M / $20M = 30%.
Combined ratio: 67.5% + 30% = 97.5%.
Since 97.5% is below 100%, the account produced an underwriting profit of 2.5 cents per premium dollar, before any investment income.

The combined ratio is 97.5% (67.5% loss ratio plus 30% expense ratio), meaning the account produced a small underwriting profit — about 2.5% of premium — before considering any investment income at all.

Related terms

Part of the Treaty Reinsurance guide, where this term is explained alongside every other treaty metric.