Combined ratio (underwriting)

Category: Underwriting practice · Reviewed by Al Jabbar, Broker · Specialist Risks · Last reviewed

Combined ratio (underwriting)

The combined ratio is the principal headline measure of underwriting performance in non-life insurance. It is the sum of the loss ratio and the expense ratio expressed as a percentage of earned premium.

Formula

Combined ratio = Loss ratio + Expense ratio

= (Incurred losses + LAE) / Earned premium + (Acquisition + Administrative expenses) / Earned premium (or Written premium, depending on convention)

Conventions

Trade-basis combined ratio — expenses expressed against written premium (US convention).
Financial-basis combined ratio — expenses expressed against earned premium (Solvency II / European convention).

The two differ when premium volumes are changing.

Interpretation

CR < 100% — underwriting profit (the business made money on insurance before investment income).
CR = 100% — break-even on underwriting; profit comes only from investment.
CR > 100% — underwriting loss; investment income must compensate.
CR < 90% — very strong underwriting; typically only in hard markets or specialty niches.
CR > 110% — usually unsustainable; capital impairment risk if continued.

Components by line

Typical UK industry combined ratios over recent cycles:

Line	Hard market CR	Soft market CR
Personal motor	95%	108%
Commercial motor	92%	110%
Personal home	88%	100%
Commercial property	85%	105%
EL/PL	90%	115%
Professional indemnity	80%	115%

References

ABI annual statistics.
Lloyd’s annual reports.
PRA published insurer SFCR data.

Cross-references

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.

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