Combined Ratio
The combined ratio of two or more ratios is the ratio of the combined or total number of units to the combined or total number of units in the given ratios.
Formula for Combined Ratio:
Combined Ratio = a/b = (a1/b1) + (a2/b2) + ...
where:
- a is the total number of units in the combined ratio.
- b is the total number of units in the given ratios.
- a1, a2, …, an are the numbers of units in each ratio.
- b1, b2, …, bn are the numbers of units in each ratio.
Steps to Find Combined Ratio:
- Find the total number of units in the combined ratio (a).
- Add the ratios (a1/b1, a2/b2, …) together.
- Simplify the resulting fraction or decimal.
Example:
Find the combined ratio of the following ratios:
2/3, 3/4, 5/6
Solution:
- Total number of units (a) = 2/3 + 3/4 + 5/6 = 11/12
- Combined ratio = 2/3 = 11/12
Therefore, the combined ratio is 11/12.
FAQs
What is the combined ratio?
The combined ratio is a key financial metric used in the insurance industry to assess profitability. It measures the percentage of premiums paid out in claims and expenses. A combined ratio under 100% indicates that the company is making an underwriting profit, while a ratio over 100% shows a loss.
What is the formula for the combined ratio?
The formula for the combined ratio is: Combined Ratio = (Incurred Losses + Expenses) / Earned Premiums This ratio is expressed as a percentage and helps insurers evaluate their operational performance.
How do you calculate the combined ratio?
To calculate the combined ratio, add the insurerโs incurred losses (including claims and adjustment expenses) to their operating expenses, then divide the sum by the total earned premiums. The result is expressed as a percentage.
Can the combined ratio be over 100% and still be profitable?
Yes, an insurer can still be profitable even with a combined ratio over 100%. This is possible if the company generates additional income through investments, which can offset underwriting losses.
How does the combined ratio impact an insurance company?
The combined ratio helps insurance companies evaluate their underwriting efficiency. A lower combined ratio indicates that a company is managing claims and expenses well, leading to profitability. A ratio higher than 100% means the company is paying out more in claims and expenses than it is earning from premiums, leading to an underwriting loss.
