Combined Ratio

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Combined Ratio The “Combined Ratio”, also called “Operating Ratio”, corresponds to the arithmetic sum of two ratios: the incurred loss to an earned premium, and the incurred expense to a written premium. Simply explain combined ratio assess an insurance company's profitability. It essentially measures how much money an insurance company pays out in claims and expenses relative to the premiums it collects. Applicable formula: -Combined Ratio = (Incurred Losses + Loss Adjustment Expenses) / Earned Premiums -Incurred Losses: This represents the total amount of money the insurance company pays out to settle claims. -Loss Adjustment Expenses: These are the costs associated with investigating and adjusting claims, such as adjuster fees and legal expenses. -Earned Premiums: This refers to the portion of the total premiums collected that corresponds to the coverage period. (Unearned premiums are those collected but attributable to a future period and are returned if the policy is canceled). Interpretation: -When Combined Ratio < 100%: This indicates an underwriting profit, meaning the insurance company is collecting more in premiums than it pays out in claims and expenses. -When Combined Ratio = 100%: This represents a break-even point, where the company's income from premiums exactly covers its claim and expense costs. -When Combined Ratio > 100%: This signifies an underwriting loss, meaning the company is paying out more in claims and expenses than it receives in premiums. This situation is not sustainable in the long run. Why is Combined Ratio Important? -Profitability Indicator -Premium Setting -Consumer Consideration Limitations of Combined Ratio. 1- Combined ratio doesn't consider Investment Income 2- Combined ratio provides a snapshot of profitability in the short vs. Long-Term In conclusion, the combined ratio is a valuable tool for understanding an insurance company's profitability. It helps assess how efficiently they manage claims and expenses relative to the premiums they collect. #BeNewinsurance #InsurTech #inclusiveinsurance #insurance #reinsurance #takaful

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