What is the formula for the combined ratio?

What is the formula for the combined ratio?

• A. Loss ratio plus expense ratio.
• B. Loss ratio minus expense ratio.
• C. Expense ratio plus earned premium.
• D. Claim ratio plus policy fee.

Answer: (A)

The combined ratio is a measure of underwriting performance that you assess by adding two components: the loss ratio and the expense ratio. The loss ratio represents claims costs (losses plus loss adjustment expenses) as a percent of net premiums earned, while the expense ratio represents underwriting operating expenses as a percent of net premiums earned. By summing these two ratios, you get the total portion of earned premiums eaten up by claims and expenses. If that total is under 100%, underwriting is profitable; over 100% means an underwriting loss. Using any other operation, like subtracting the ratios or mixing in earned premium with the expense ratio, wouldn’t correctly reflect underwriting profitability.

The combined ratio is a measure of underwriting performance that you assess by adding two components: the loss ratio and the expense ratio. The loss ratio represents claims costs (losses plus loss adjustment expenses) as a percent of net premiums earned, while the expense ratio represents underwriting operating expenses as a percent of net premiums earned. By summing these two ratios, you get the total portion of earned premiums eaten up by claims and expenses. If that total is under 100%, underwriting is profitable; over 100% means an underwriting loss. Using any other operation, like subtracting the ratios or mixing in earned premium with the expense ratio, wouldn’t correctly reflect underwriting profitability.