How the Combined Ratio Calculator works
The combined ratio is the classic scorecard for property and casualty insurance underwriting: it compares everything an insurer paid out on claims and running the book of business against everything it collected in premium for the coverage period. It answers a simple question — did the premium collected cover the cost of claims and the cost of doing business, before any investment income is counted?
The formula
Combined Ratio = (Incurred Losses + Loss Adjustment Expenses + Underwriting Expenses) / Earned Premium, expressed as a percentage. It splits cleanly into two component ratios that are simply added together:
- Loss ratio = (Incurred Losses + Loss Adjustment Expenses) / Earned Premium — the share of premium consumed by claims and the cost of settling them.
- Expense ratio = Underwriting Expenses / Earned Premium — the share of premium consumed by commissions, overhead, and other costs of acquiring and servicing policies.
Combined Ratio = Loss Ratio + Expense Ratio. This calculator uses earned premium as the denominator for both components, the common simplified convention; some insurers report the expense ratio against written premium instead, which can shift the figure slightly for a growing or shrinking book of business.
Worked example
Take $650,000 of incurred losses, $50,000 of loss adjustment expenses, $250,000 of underwriting expenses, and $1,000,000 of earned premium. The loss ratio is ($650,000 + $50,000) / $1,000,000 = 70%. The expense ratio is $250,000 / $1,000,000 = 25%. The combined ratio is 70% + 25% = 95%, meaning the insurer kept 5 cents of every premium dollar as underwriting profit before investment income — an underwriting result of $50,000.
Reading the result
- Below 100%: premium exceeded losses and expenses — an underwriting profit.
- Exactly 100%: premium exactly covered losses and expenses — underwriting break-even.
- Above 100%: losses and expenses exceeded premium — an underwriting loss that must be made up by investment income for the insurer to stay profitable overall.
Combined ratio is a snapshot of underwriting discipline, not total company profitability. Insurers routinely operate with combined ratios modestly above 100% in some lines, relying on returns from investing premium float to remain profitable overall — so a ratio above 100% is a signal to look closer, not automatically a sign of financial distress.