Operating ratio

Textbook case: combined ratio of 103%, investment income equal to 8% of earned premiums, operating ratio of 95%. Underwriting loses money, the operation makes some. The operating ratio adds back what the combined ratio ignores, the income on the float: premiums collected before claims are paid, and reserves invested in the meantime. It equals the combined ratio less the ratio of investment income to earned premiums. How much it matters depends on the line. In property, where claims settle within months, the float is thin and the gap between the two ratios is a few points. In liability or construction, where settlement stretches over ten to fifteen years, the float is several times the annual premium: the gap can reach ten to fifteen points, enough to make viable a book a combined ratio would call lost. Two caveats in reading it. It leaves out realized capital gains and tax, so it is no net result, and it rewards an interest rate risk the line never chose to carry.