By CFO Brew Staff
less than 3 min read
Definition:
The cost-minded CFO should know about combined ratio, even if it’s not a relevant KPI to their organization, because it can be a window into the future price of their insurance policies. We know it seems like arcane stuff, but it’s an important metric for insurance companies to consider. The combined ratio measures the profitability of insurance carriers, where a ratio of 100% is the break-even point. Anything below 100% shows a profit, and anything above it means a carrier is losing money.
Understanding how to interpret the combined ratio
Insurance carriers use the combined ratio to measure how much they’re taking in from premiums relative to how much they’re spending. Carriers want that bad boy to read under 100, at the very least, although they still might not consider something in the upper 90s to be “healthy,” necessarily.
How it’s calculated
The formula is rather simple (getting those inputs, of course, is another story). To calculate the combined ratio, carriers add up losses they’ve paid to customers, along with other expenses, then divide that total by the premiums they’ve raked in from policies.
Predicting the future
Of course, carriers will aim to bring a business unit—such as commercial auto or workers compensation—to profitability if the combined ratio is above 100%. They may tighten up underwriting requirements, get choosier about what risks they cover, raise prices, use a combination of those, or other things. While sometimes premium increases will be unavoidable, organizations can pay attention to their own risk mitigation practices to (with any luck) soften the blow.
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