The combined ratio is used to determine the profitability of an insurance company by calculating losses and expenses incurred and dividing them by earned premiums. A ratio of 100% or less indicates profitability, and tracking the ratio is important for both the company and customers. Adjustments may need to be made if the ratio is equal to or greater than 100%. Many companies calculate the ratio quarterly or monthly to track success in writing new policies and sales techniques.
Combined indices are one of the tools used to determine the profitability of an insurance company. Essentially, the ratio is calculated by determining the amount of losses incurred, adding the amount of expenses incurred by the company, and dividing that combined amount by the earned premium generated during the same period. The profitable insurance company will consistently exhibit a combined ratio that is equal to or less than 100%.
It is very important to use the combined ratio to track the performance of the company. In order to remain profitable and serve customers, the insurance company must be able to earn more premium revenue than it is paying. While premiums are usually just one source of income for an insurance company, it is often the main source of income. Ensuring that premium flow exceeds expenses results in a stable company that will be around for a long time.
Customers also have a vested interest in the combined ratio of their insurance companies, as the ratio reflects the financial health of the provider. In the event that the insurance company consistently experiences a combination
If the ratio is equal to or greater than 100%, there is a strong indication that the provider will need to make some adjustments to stay up and running. This may mean reducing customer service or increasing premiums to make up the difference. In both cases, the degree of customer satisfaction is affected. In the worst case scenario, the customer finds that claim payment slows down significantly and the ability to get answers to coverage questions takes longer.
Many insurance companies choose to calculate a combined index at least quarterly. In some cases, a provider may choose to calculate the ratio on a monthly basis. This is because the combined ratio can also provide information about the current level of success in writing new policies and the effectiveness of current sales techniques in a given sector of the market.
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