Claimstrainer Blog

What is "Combined Ratio" and why should claims people care?

The combined Ratio is important to claims people because it is a measure of success. The lower the better. We contribute to this metric with efficent claims handling. This results in possible financial rewards given the company will make more money with an impressive combine ratio.

The combined ratio in insurance, combination of the loss ration and the expense ratio:
1. Loss Ratio
= Incurred Losses + Loss Adjustment ExpenseEarned Premiums

2. Expenses Ratio
=Incurred ExpensesWritten Premiums

The combined ratio is important to an insurance company since it indicates whether or not the company is earning a profit on the business it is writing, not taking into account investment returns on the premiums received. The property and casualty insurance business sometimes goes through cycles. During the 1980s, for instance, it was not unusual to have a combined ratio of over 120%. Obviously, the difference has to be made up from the company's surplus, which in some instances even put the major companies under severe financial strain.

This metric is useful to determine and compare the profitability between insurance companies. A combined ratio of less than 100% means that the company is profitable, as its premiums earned are greater than its total expenses. For example, an insurer with $800 in expenses and $1,000 in premiums earned has a combined ratio of 80% (800/1000). However, companies with combined ratios over 100% may still earn a profit because the ratio does not account for Investment Income.

Lower combined ratios signal that the company is more profitable than competitors with higher combined ratios.