combined ratio
If you want one number that says whether an insurer made or lost money on the actual business of insuring — before counting what it earned by investing the float — that number is the combined ratio. It simply adds together the two big leaks of premium: the share paid out as claims, and the share spent running the company. Below 100 percent the underwriting made money; above 100 percent it lost money.
Precisely, combined ratio = loss ratio + expense ratio = (incurred losses + LAE) / earned premium + (underwriting expenses) / premium. A 95 percent combined ratio means that for every 100 of premium, 95 went to claims and costs, leaving a 5 underwriting profit; a 105 percent combined ratio means 5 of underwriting loss per 100 of premium. Because the loss and expense pieces sometimes use different premium bases (earned vs written), the combined ratio is a blend of conventions — but the interpretation around the 100 percent line holds.
It matters as the headline scorecard of underwriting discipline, watched by managers, analysts, and regulators alike. Crucially, a combined ratio above 100 does not always mean the company lost money overall: insurers also earn investment income on premiums and reserves held before claims are paid, so a long-tailed line can run a combined ratio over 100 and still be profitable once investment return is added. The honest caveat: the combined ratio ignores investment income and the time value of money entirely, so for slow-paying lines it overstates how bad things are, and for fast-paying lines it is closer to the whole story.
A line runs a 72 percent loss-and-LAE ratio and a 26 percent expense ratio. Combined ratio = 72 + 26 = 98 percent — a 2 percent underwriting profit before investment income. If next year storms push the loss ratio to 80, the combined hits 106 and underwriting swings to a loss.
Combined ratio = loss ratio + expense ratio; below 100 = underwriting profit (before investment income).
A combined ratio over 100 is not automatically a money-losing year — investment income on held premiums and reserves can more than cover it, especially in long-tailed lines. The combined ratio deliberately ignores investment return and time value, so read it alongside, not instead of, the bottom line.