Expense ratio

An insurer writes 100 of premium, pays 22 in broker commission and 9 in operating costs: its expense ratio is 31%. Add the loss ratio and you get the combined ratio, and it is often what pushes a book above 100. It measures what the machine costs to run: distribution, acquisition, administration, everything but claims. A high ratio usually comes from the channel, brokerage costing more than direct sales, or from a scale too small to absorb fixed costs. The basis changes the number and has to be stated before any comparison: the European convention divides expenses by earned premium; the US trade basis divides acquisition costs by written premium, which flatters the ratio of a growing book. Claims handling expenses sit with expenses under some standards and with losses under others, so two equally efficient insurers can show several points of difference.