How this calculator works
Insurance underwriting is judged by the combined ratio, which compares what an insurer pays out with what it collects in premiums. The loss ratio is claims plus the cost of handling them, divided by premiums earned. The expense ratio is the cost of running the underwriting operation, divided by the same premiums. Add the two and you have the combined ratio. A combined ratio below 100% means the insurer earned an underwriting profit before investment income; above 100% means underwriting lost money and investment income has to fill the gap. The ratio says nothing about investment returns, which for many insurers are a large part of total profit. Losses must be matched to the same period as the premiums: an insurer that writes a lot of new business late in the year collects premiums before the claims arrive, which flatters the ratio temporarily. Reserves for claims that have occurred but not yet been paid belong in the loss figure. Reinsurance changes the picture too: the ratio should use premiums and losses net of reinsurance if you want the economics that remain with the insurer. This is the standard presentation used in insurance company reporting and is not affected by the currency the figures are in, because every term is a share of premiums.
Formula
Loss ratio = (claims paid + loss adjustment expenses) / premiums earned. Expense ratio = underwriting expenses / premiums earned. Combined ratio = loss ratio + expense ratio. Underwriting result = premiums earned - claims - loss adjustment expenses - underwriting expenses. Underwriting margin = underwriting result / premiums earned.
Worked example
An insurer earns $1,000,000 of premiums, pays $600,000 of claims, spends $50,000 adjusting them and $300,000 underwriting. The loss ratio is $650,000 / $1,000,000 = 65%, the expense ratio is 30%, and the combined ratio is 95%. The underwriting result is $50,000, a 5% margin. If claims rose to $700,000 with the same other figures, the combined ratio would be 105% and underwriting would lose $50,000.
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Frequently asked questions
Is a combined ratio of 100% break-even?
It is break-even on underwriting alone. The insurer still earns investment income on the premiums and reserves it holds, so many insurers report an underwriting loss and still make a profit overall.
Should the ratio use gross or net premiums?
Use the same basis for both premiums and losses and state which one. Net of reinsurance shows what the insurer keeps; gross shows the book it manages. Mixing the two produces a meaningless ratio.
What belongs in underwriting expenses?
Commissions, staff costs, advertising, administration and other costs of acquiring and servicing the business. Investment management costs do not belong here because they are not part of underwriting.
How does this differ from a loss ratio on its own?
The loss ratio covers only claims and their handling. The combined ratio adds the cost of running the business, so it answers whether the whole underwriting operation paid for itself.