Combined ratio
A measure of a non-life insurer's technical profitability, comparing the sum of claims and expenses to earned premiums.
The combined ratio is the basic measure of a non-life insurer's technical profitability. It is the cost of claims, which drives the loss ratio, plus acquisition and administrative expenses, which drive the expense ratio, divided by earned premiums. Below 100 percent, the insurance business itself turns a profit before any investment income. Above 100 percent, it posts a technical loss that investment returns may or may not offset. Analysts use it to compare insurers, lines of business or accounting years, and to track a market's underwriting discipline. A ratio above 100 percent is not necessarily bad business: an insurer with a long investment horizon can accept a moderate technical loss if its investment income covers it. When rates are low, that argument falls away and technical discipline becomes imperative again, since asset returns can no longer absorb a poor ratio.
Hypothetical case: an insurer reporting a 62 percent loss ratio and a 31 percent expense ratio has a combined ratio of 93 percent, hence a technical margin of 7 points before investment income.
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