How to Calculate a Combined Ratio in Insurance

by Tom Johnson ; Updated July 27, 2017

Various ratios of costs and expenses help analysts determine an insurance company's strength and profitability from its insurance underwriting business. One such ratio is the combined ratio, which measures the profit or loss from each dollar of insurance premium received from policyholders. For instance, if an insurance company has a combined ratio of 1.05, it is paying $1.05 in claim payments and expenses for each dollar of premium it receives. Analysts combine two other ratios - the loss ratio and the expense ratio - to calculate the combined ratio.

Step 1

Obtain a copy of an insurer’s income statement from your state's department of insurance or directly from the insurer. If the company's stock is publicly traded, you can usually find the income statement in the company’s annual report.

Step 2

Locate the net premiums earned, loss payments, loss adjustment expenses and underwriting expenses on the income statement.

Step 3

Calculate the loss ratio by adding the loss payments and loss adjustment expenses and dividing that amount by the net premiums earned. Loss payments are the amount paid to settle claims, and the loss adjustment expenses are the expenses incurred in settling those claims, such as attorney fees and claims adjuster salaries.

Step 4

Calculate the expense ratio by dividing the underwriting expenses by the net premiums earned. Underwriting expenses include advertising expenses and broker commissions.

Step 5

Add the loss ratio to the expense ratio to determine the combined ratio. A combined ratio of less than 1.0 indicates that the company's underwriting is generating a profit. A combined ratio of 1.0 or larger doesn't mean that the company is unprofitable, however, because the combined ratio doesn't take into account earnings from investments. The combined ratio is more of an indicator of a firm's profitability from its operations alone.

About the Author

Tom Johnson graduated from the University of South Carolina in 1995 with a Bachelor of Science in finance. He has worked in the insurance industry for over 15 years and is currently employed by a government agency that regulates insurance companies and brokers. Johnson began freelance writing in 2009, focusing his efforts on insurance and finance-related articles.