1. What is Combined Operating Ratio?

The Combined Operating Ratio is a key profitability metric used in the insurance industry to measure the overall underwriting performance of an insurance company. It represents the percentage of premium dollars spent on claims and expenses.

2. How Does the Calculator Work?

The calculator uses the Combined Operating Ratio formula:

Where:

• \( \text{Losses} \) — Total claims paid and loss reserves (USD)
• \( \text{Expenses} \) — Underwriting and operational expenses (USD)
• \( \text{Premiums} \) — Total premiums earned (USD)

Explanation: The ratio indicates how efficiently an insurer is operating. A ratio below 100% indicates underwriting profit, while above 100% indicates underwriting loss.

3. Importance of Combined Operating Ratio

Details: This ratio is crucial for insurance companies, investors, and regulators to assess the financial health and operational efficiency of an insurance provider. It helps in evaluating pricing adequacy and expense management.

4. Using the Calculator

Tips: Enter all values in USD. Losses and expenses should be positive numbers, while premiums must be greater than zero. The result shows the combined ratio as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What does a Combined Operating Ratio of 95% mean?
A: A ratio of 95% indicates that for every dollar of premium earned, the insurer spent 95 cents on claims and expenses, resulting in a 5% underwriting profit.

Q2: What is considered a good Combined Operating Ratio?
A: Generally, a ratio below 100% is considered good, with ratios between 95-100% being typical for profitable insurers. Ratios below 90% indicate excellent performance.

Q3: How is this different from Loss Ratio?
A: Loss Ratio only considers claims paid vs premiums, while Combined Operating Ratio includes both claims and operating expenses.

Q4: Can the ratio exceed 100%?
A: Yes, a ratio above 100% indicates the insurer is paying out more in claims and expenses than it's collecting in premiums, resulting in underwriting loss.

Q5: How do investment income affect this ratio?
A: Investment income is not included in the Combined Operating Ratio calculation. This ratio focuses solely on underwriting performance.