Question

a) How is the combined ratio of a property and casualty insurance company calculated, and what does the combines ratio measure?

b )How is it possible for a property and casualty insurance company to be profitable if its combined ratio exceeds one (or 100%)?

Answer 1

1. The combined ratio is the sum of the loss ratio and the expense ratio. the loss ratio is calculated by dividing the sum of losses and loss adjustment expenses by premiums earned. the expense ratio is calculated by dividing underwriting expenses by premiums written.

The combined ratio measures underwriting profitability. If the ratio exceeds 1 , the insurer has lost money from its underwriting activities. if the combined ratio is less than 1 , it means that the insurer has made money from its underwriting activities .

2. It is important to remember that the combined ratio measures underwriting performance only. Insurance company have second source of revenues. investment income. An insurance company can lose money on its underwriting activities , but still be profitable , overall, if its investment income offsets the underwriting loss.