How to Calculate a Combined Ratio in Insurance
When evaluating the financial strength of an insurance company, there are several ratios that are used that are unique to the insurance industry. On 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. When calculating the combined ratio, two other insurance financial ratios -- the loss ratio and the expense ratio -- are used.
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Instructions
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1
Obtain a copy of an insurer's income state from the department of insurance for your state or directly from the insurer. If the company has stock that is publicly traded, you can usually find the income statement in the company's annual report.
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Locate the net premiums earned, loss payments, loss adjustment expenses and underwriting expenses on the income statement.
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Calculate the loss ratio by adding together 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.
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Calculate the expense ratio by dividing the underwriting expenses by the net premiums earned. Underwriting expenses include advertising expenses and broker commissions.
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Add the loss ratio to the expense ratio to determine the combined ratio.
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Tips & Warnings
A combined ratio of greater than 1 does not necessarily mean an insurance company is unprofitable. The combined ratio does not factor in earning from investments.
