Category:

# What is a Combined Ratio?

Article Details
• Written By: Malcolm Tatum
• Edited By: Bronwyn Harris
2003-2018
Conjecture Corporation
 India is building what will become the world’s biggest statue; it will be twice as tall as the Statue of Liberty.  more...

 June 20 ,  1877 :  The world's first commercial telephone was installed.  more...
wiseGEEK Slideshows

Combined ratios are one of the tools that are employed to determine the profitability of an insurance company. Essentially, the ratio is calculated by determining the amount of incurred losses, adding in the amount of expenses incurred by the company, and dividing that combined amount by the earned premium generated during the same period. The profitable insurance company will consistently exhibit a combined ratio that is equal to or under 100%.

Utilizing the combined ratio to track the performance of the company is very important. In order to remain profitable and provide service to customers, the insurance corporation must be able to take in more revenue from premiums than it is paying out. While premiums are usually only one source of income for an insurance company, it is often the main source of revenue. Making sure that the flow of premiums is exceeding expenses results in a stable company that will be around for a long time.

Customers also have a vested interest in the combined ratio of their insurance carriers, since the ratio reflects the financial health of the provider. In the event that the insurance company consistently experiences a combined ratio that is equal to or over 100%, there is a strong indication that the provider will need to make some adjustment in order to remain in operation. This may involve cutting customer support services, or raising premiums to make up the difference. In both instances, the degree of customer satisfaction is impacted. At worst, the customer finds that payment of claims slows down considerably and that the ability to get answers to questions about coverage takes longer to obtain.

Many insurance companies choose to calculate a combined ratio on at least a quarterly basis. In some cases, a provider may choose to calculate the ratio on a monthly basis. This is because the combined ratio can also yield information about the current level of success in writing new policies, and how effective current sales techniques are in a given sector of the market.

## Recommended

 anon17646 Post 2 Anon17645 - Actually, even if the combined ratio is above of 100%, the insurance company can still be considered profitable because of their investment income. anon17645 Post 1 A company experiencing a combined ratio in excess of 100% is operating at an underwriting loss, not underwriting profitability. Example #1: incurred losses- \$800; operating expenses- \$200; earned premium- \$1,000. The combined ratio is 100%, the insurer broke even. Example #2: incurred losses- \$800; operating expenses- \$200; earned premium- \$950 (\$50 less in earned premium). Combined ratio is 105% which is not profitable.