Combined ratio

The combined ratio measures whether an insurer's core underwriting business — writing and paying out on policies, separate from investment income — is profitable. It is calculated as (incurred losses + underwriting expenses) / earned premium, often expressed as a percentage.

A combined ratio below 100% means the insurer earned more in premium than it paid out in claims and expenses, generating an underwriting profit. A ratio above 100% means the underwriting side of the business lost money on its own, though the insurer can still be profitable overall if investment returns on premium reserves make up the difference — a common situation, since insurers invest premium between when it's collected and when claims are paid. The combined ratio extends the loss ratio by adding operating and acquisition expenses, giving a more complete profitability picture than losses alone.

The metric is tracked by line of business and over time to judge whether pricing and risk selection, the work of underwriting analytics, are sound, and it feeds directly into actuarial modeling used for rate-setting and reserving. A common pitfall is comparing combined ratios across insurers without accounting for different reinsurance structures or expense allocation methods, both of which shift the reported number without a real change in underlying risk, and claims analytics output can move the ratio well before a change is visible in reported profit.