Actuarial & Insurance
Intermediate

Combined Ratio

Total cost ratio: losses plus expenses vs premium.

Formula

CR=LR+ERCR = LR + ER

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Variables

CRCombined ratio
LRLoss ratio
ERExpense ratio

Example

LR=70%, ER=25%: CR = 95% (a 5% underwriting profit)

How it works

The combined ratio measures how much of an insurer’s earned premium is consumed by claims and operating costs. It works because both the loss ratio and expense ratio are already expressed as proportions of premium, so adding them gives the total cost burden before investment income is considered. A result below 100% indicates underwriting profit, while a result above 100% means premiums did not fully cover losses and expenses.

When to use it

Use this when evaluating the underwriting performance of a property and casualty insurer or comparing different lines of insurance business. It is especially useful for checking whether premium income is sufficient to pay claims and run the business without relying on investment returns.

Worked example, step by step

Suppose an insurer has a loss ratio of 62% and an expense ratio of 31%. CR = LR + ER CR = 62% + 31% CR = 93% This means 93% of premium is used to pay claims and expenses, leaving 7% as underwriting profit before investment income.

Common mistakes to avoid

  • Using written premium instead of earned premium when the ratios are based on earned premium
  • Assuming a combined ratio below 100% means total company profit, when it only shows underwriting profit
  • Mixing percentages and decimals incorrectly, such as adding 0.62 and 31 instead of 0.62 and 0.31

Did You Know?

A combined ratio below 100% means the insurer profits on underwriting alone, before any investment income.

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Reviewed & maintained by the FormulaWon editorial teamLast reviewed September 2026