What does Combined Ratio mean?

Combined Ratio is a process by which insurance companies determine in what degree the business makes profitable transactions, and which is the degree of losses. For example, by using the formula for calculating the combined ratio, the company might get a ratio which is well above 100%, which means that there is more expenditure related to client demands than there is any profit from the premiums these customers pay for the insurance. And in this case, the formula indicates that the company suffers losses. While in the case the formula gives a lower percentage than 100%, that means that the company is making profits. The mathematical formula by which there is determined this ratio is by adding up the incurred losses with the expenses and then dividing this result to the income the company made from the premiums individuals pay.

Combined Ratio explained

Profit that the company makes from certain investitures is not comprised by the formula, so even in the case the result ratio exceeds 100% the company still has the profit from these investments left. Money made from investments is left out from the formula on purpose, because only without these amounts taken into consideration can be made an efficient calculation of pure profit.