How Is Combined Operating Ratio Calculated

Combined Operating Ratio Formula:

\[ COR = \text{Loss Ratio} + \text{Expense Ratio} \]

Combined Operating Ratio (COR):

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1. What Is Combined Operating Ratio?

The Combined Operating Ratio (COR) is a key profitability metric used in the insurance industry to measure underwriting performance. It represents the sum of the loss ratio and expense ratio, indicating the percentage of premium dollars spent on claims and expenses.

2. How Is COR Calculated?

The calculator uses the COR formula:

\[ COR = \text{Loss Ratio} + \text{Expense Ratio} \]

Where:

\( \text{Loss Ratio} \) — Incurred losses divided by earned premiums
\( \text{Expense Ratio} \) — Underwriting expenses divided by written premiums
\( COR \) — Combined Operating Ratio expressed as percentage

Explanation: A COR below 100% indicates underwriting profit, while a COR above 100% indicates underwriting loss.

3. Importance of Combined Operating Ratio

Details: COR is crucial for insurers to assess underwriting efficiency, pricing adequacy, and overall operational performance. It helps identify areas for cost control and profitability improvement.

4. Using the Calculator

Tips: Enter loss ratio and expense ratio as percentages. Both values must be non-negative numbers representing valid ratios.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Combined Operating Ratio?
A: A COR below 100% is generally considered good, indicating underwriting profitability. The lower the COR, the better the underwriting performance.

Q2: How does COR differ from combined ratio?
A: Combined Operating Ratio and combined ratio are often used interchangeably in insurance terminology, both referring to the sum of loss ratio and expense ratio.

Q3: What components make up the expense ratio?
A: Expense ratio includes commissions, salaries, administrative costs, marketing expenses, and other operational costs divided by written premiums.

Q4: Can COR be negative?
A: No, COR cannot be negative as both loss ratio and expense ratio are non-negative percentages. However, it can theoretically exceed 100%.

Q5: How often should COR be calculated?
A: Insurers typically calculate COR quarterly and annually to monitor underwriting performance and make strategic decisions.