Definition of combined ratio

in insurance, combination of the loss ratio and the expense ratio:

1. 1. Loss Ratio

   =

   Incurred Losses + Loss Adjustment Expense Earned Premiums

2. 2. Expenses Ratio

   =

   Incurred Expenses Written Premiums

The combined ratio is important to an insurance company since it indicates whether or not the company is earning a profit on the business it is writing, not taking into account investment returns on the premiums received. The property and casualty insurance business sometimes goes through cycles. During the 1980s, for instance, it was not unusual to have a combined ratio of over 120%. Obviously, the difference has to be made up from the company's surplus, which in some instances even put the major companies under severe financial strain.