26 July 2014

Definition of ‘Combined Ratio’ for Insurance Business

Definition of ‘Combined Ratio’


A measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.


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The combined ratio is comprised of the claims ratio and the expense ratio. The claims ratio is claims owed as a percentage of revenue earned from premiums. The expense ratio is operating costs as a percentage of revenue earned from premiums. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium.


Calculated as:


Combined Ratio

Shashi explains ‘Combined Ratio’


Even if the combined ratio is above of 100%, a company can potentially still make a profit, because the ratio does not include the income received from investments.


Many insurance companies believe that this is the best way to measure the success of a company because it does not include investment income and therefore only includes profit that is earned through efficient management.




Filed under: Must Know It Tagged: Insurance



from: http://bit.ly/1t7Sfbo

on: July 26, 2014 at 05:10PM
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