How Is Combined Ratio Calculated

Combined Ratio Formula:

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

Combined Ratio (CR):

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1. What Is Combined Ratio?

The Combined Ratio (CR) is a key profitability metric used in the insurance industry to measure the overall underwriting performance of an insurance company. It represents the sum of the loss ratio and expense ratio.

2. How Is Combined Ratio Calculated?

The calculator uses the Combined Ratio formula:

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

Where:

$ \text{Loss Ratio} $ — Incurred losses divided by earned premiums
$ \text{Expense Ratio} $ — Underwriting expenses divided by written premiums
$ CR $ — Combined Ratio expressed as a percentage

Explanation: A combined ratio below 100% indicates an underwriting profit, while a ratio above 100% indicates an underwriting loss.

3. Importance Of Combined Ratio

Details: The combined ratio is crucial for insurance companies to assess their underwriting profitability, pricing adequacy, and operational efficiency. It helps insurers determine if their premium rates are sufficient to cover claims and expenses.

4. Using The Calculator

Tips: Enter the loss ratio and expense ratio as percentages. Both values must be non-negative numbers. The calculator will automatically compute the combined ratio.

5. Frequently Asked Questions (FAQ)

Q1: What does a combined ratio of 95% mean?
A: A combined ratio of 95% indicates that for every $1 of premium collected, the insurer spends $0.95 on claims and expenses, resulting in a 5% underwriting profit.

Q2: What is considered a good combined ratio?
A: Generally, a combined ratio below 100% is considered good, with ratios between 95-100% being typical for profitable insurers. Ratios below 90% are excellent.

Q3: How is loss ratio different from combined ratio?
A: Loss ratio only considers claims costs, while combined ratio includes both claims costs (loss ratio) and operating expenses (expense ratio).

Q4: Can combined ratio be negative?
A: No, combined ratio cannot be negative as both loss ratio and expense ratio are non-negative percentages.

Q5: Why is combined ratio important for investors?
A: Investors use combined ratio to evaluate an insurance company's underwriting discipline, pricing strategy, and overall financial health.