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Insurance

Combined Ratio Calculator

Calculate insurance combined ratio, loss ratio, and expense ratio to evaluate insurance company underwriting profitability.

Insurance underwriting financials

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Combined ratio

92.00%

Underwriting Profit • +$80,000.00 (+8.00% margin)

Loss ratio

65.00%

$650.0K

Expense ratio

27.00%

$270.0K

Underwriting profit

+$80,000.00

+8.0% margin

Premium revenue allocation

Earned premium$1.0M
  • Losses & LAE$650,000.0065.0%
  • Underwriting expenses$270,000.0027.0%
  • Underwriting profit$80,000.008.0%

How combined ratio is calculated

The combined ratio evaluates the total outflow of claims and operating expenses against earned premiums.

  1. Total incurred losses & loss adjustment expenses (LAE)

    Total Losses & LAE=Incurred Losses+LAE\text{Total Losses \& LAE} = \text{Incurred Losses} + \text{LAE}

    Add incurred claims of $600,000.00 and loss adjustment expenses of $50,000.00 to get total claim costs of $650,000.00.

  2. Calculate loss ratio

    Loss Ratio=Total Losses & LAEEarned Premiums×100%\text{Loss Ratio} = \frac{\text{Total Losses \& LAE}}{\text{Earned Premiums}} \times 100\%

    Divide total losses of $650,000.00 by earned premiums of $1,000,000.00. The loss ratio is 65.00%.

  3. Calculate expense ratio

    Expense Ratio=Underwriting ExpensesEarned Premiums×100%\text{Expense Ratio} = \frac{\text{Underwriting Expenses}}{\text{Earned Premiums}} \times 100\%

    Divide underwriting & operating expenses of $270,000.00 by earned premiums of $1,000,000.00. The expense ratio is 27.00%.

  4. Calculate combined ratio

    Combined Ratio=Loss Ratio+Expense Ratio\text{Combined Ratio} = \text{Loss Ratio} + \text{Expense Ratio}

    Sum the loss ratio (65.00%) and expense ratio (27.00%). The combined ratio is 92.00%.

  5. Determine underwriting profitability

    Underwriting Profit=Earned Premiums−Total Costs\text{Underwriting Profit} = \text{Earned Premiums} - \text{Total Costs}

    Subtract total underwriting outflows of $920,000.00 from earned premiums of $1,000,000.00. The result is an underwriting profit of $80,000.00 (+8.00% margin). The company collects more in premiums than it pays out in claims and expenses.

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What is the combined ratio in insurance?

The combined ratio is the premier financial metric used to measure the underwriting profitability of property and casualty (P&C) insurance companies. It measures whether an insurer brings in more money from policy premiums than it spends on claims payouts, claim settlement costs, and operating overhead.

Unlike general businesses that track operating margins through an accounting profit calculator or determine sales volume thresholds with a break-even calculator, insurers separate underwriting performance from investment gains. A combined ratio below 100% signifies underwriting profit, whereas a ratio above 100% indicates that premium revenue fell short of claims and overhead.

The combined ratio formula and components

The combined ratio equals the sum of an insurer's loss ratio and expense ratio. When an insurer pays policyholder dividends (common among mutual insurance organizations), the dividend ratio is also added:

Combined Ratio=Loss Ratio+Expense Ratio+Dividend Ratio\text{Combined Ratio} = \text{Loss Ratio} + \text{Expense Ratio} + \text{Dividend Ratio}

Expressed in total dollar amounts relative to earned premiums:

Combined Ratio=Incurred Losses+LAE+Underwriting Expenses+DividendsEarned Premiums×100%\text{Combined Ratio} = \frac{\text{Incurred Losses} + \text{LAE} + \text{Underwriting Expenses} + \text{Dividends}}{\text{Earned Premiums}} \times 100\%

1. Loss ratio (claims and claim settlement)

The loss ratio measures the percentage of earned premiums consumed by policyholder claims and loss adjustment expenses (LAE):

Loss Ratio=Incurred Losses+LAEEarned Premiums×100%\text{Loss Ratio} = \frac{\text{Incurred Losses} + \text{LAE}}{\text{Earned Premiums}} \times 100\%

Incurred losses include both claims paid out during the period and net additions to actuarial loss reserves for future claim payments. LAE covers direct legal defense, engineering inspections, and claims adjuster fees necessary to settle claims. In property claims where payouts depend on depreciation, claims teams frequently determine settlements through an actual cash value assessment.

2. Expense ratio (operational efficiency)

The expense ratio reflects the cost of acquiring and servicing insurance policies:

Expense Ratio=Underwriting & Operating ExpensesEarned Premiums×100%\text{Expense Ratio} = \frac{\text{Underwriting \& Operating Expenses}}{\text{Earned Premiums}} \times 100\%

Operating expenses include broker commissions, marketing and customer acquisition costs, staff salaries, technology infrastructure, state licensing fees, and premium taxes.

3. Underwriting profit margin

The underwriting profit margin represents the pure underwriting surplus generated per dollar of premium:

Underwriting Margin=100%−Combined Ratio\text{Underwriting Margin} = 100\% - \text{Combined Ratio}

How to interpret combined ratio results

The 100% threshold serves as the fundamental benchmark in property and casualty underwriting analysis:

  • Under 100% (Underwriting Profit): The company takes in more in premium revenue than it spends on claims and overhead. A combined ratio of 90% means the carrier retains 10 cents of underwriting profit on every premium dollar collected before accounting for investment returns.
  • Exactly 100% (Underwriting Break-Even): Premiums collected exactly match total claim payouts and operational overhead. Overall corporate profit relies entirely on investment returns earned on the reserve float.
  • Over 100% (Underwriting Loss): Claims and expenses exceed earned premiums. For example, a combined ratio of 108% indicates that the insurer spent $1.08 for every $1.00 of premium earned. To remain solvent, the insurer must generate sufficient net investment income from its invested reserves.

Worked industry example

Consider a mid-sized regional property insurer reporting the following annual financial results:

  • Earned Premiums: $10,000,000
  • Incurred Losses: $6,000,000
  • Loss Adjustment Expenses (LAE): $500,000
  • Underwriting & Operating Expenses: $2,700,000
  • Policyholder Dividends: $0

Step-by-step ratio calculations:

  1. Total Loss Outflows: $6,000,000 + $500,000 = $6,500,000
  2. Loss Ratio: ($6,500,000 / $10,000,000) × 100% = 65.00%
  3. Expense Ratio: ($2,700,000 / $10,000,000) × 100% = 27.00%
  4. Combined Ratio: 65.00% + 27.00% = 92.00%
  5. Underwriting Profit: $10,000,000 - $9,200,000 = $800,000 (8.00% margin)

Because the combined ratio is 92.00%, the insurer generated an underwriting surplus of $800,000. Any returns generated by investing its reserves and surplus capital will add directly to its bottom line net income. To evaluate short-term liquidity reserves protecting against sudden claim spikes, insurers also monitor balance sheet metrics with a cash ratio calculator.

Frequently asked questions

What is a good combined ratio for an insurance company?
A healthy combined ratio is typically between 88% and 96% for well-managed property and casualty insurers. Personal lines such as auto and homeowners insurance generally aim for 92% to 98%, while specialty and commercial lines with volatile catastrophe exposure aim for 80% to 90% during non-catastrophe years.
Can an insurer be profitable with a combined ratio over 100%?
Yes. An insurer with a combined ratio above 100% experiences an underwriting deficit on premiums alone, but can remain overall profitable if investment income from its float (premiums held before paying claims) exceeds the underwriting loss.
What is the difference between earned premiums and written premiums?
Written premiums represent the total premium on all policies issued during a period. Earned premiums represent the portion of written premiums corresponding to the exact amount of coverage time that has already elapsed. Under GAAP and statutory accounting, loss and combined ratios use earned premiums.
What is the difference between combined ratio and operating ratio?
The combined ratio only includes underwriting operations (claims, LAE, and overhead expenses). The operating ratio subtracts the net investment income ratio from the combined ratio, providing a holistic view of profitability from both insurance underwriting and portfolio investments.
What are loss adjustment expenses (LAE)?
LAE includes all costs incurred by an insurance carrier to investigate, defend, and settle claims. This includes claims adjuster fees, legal counsel fees, forensic accounting, and court costs.
Are my calculation inputs stored on the server?
No. All calculations run strictly in your web browser. Changing the input fields updates the browser URL so you can easily bookmark or share your scenarios.

Resources and references

The formulas and methods in this calculator were checked against these independent sources.