Comments on: How to calculate an insurer Combined Ratio

By: FBC

FBC — Wed, 01 Feb 2012 13:22:04 +0000

Follow what Adam Bishop says in his response to Faisal.
There would be no error as you said, because we rightly call it a “combined ratio”, otherwise it would just be a “ratio”.
Another question is : shall we deduct the reinsurance commission from the expenses? I would say “YES”.

By: Apparao

Apparao — Tue, 04 Jan 2011 04:44:19 +0000

Hi Adam,
Can we consider combined ratio formula in arriving the P&L indications in travel Industry..If not please suggest on others..

By: Philip Ide

Philip Ide — Thu, 04 Nov 2010 11:49:34 +0000

If you are using “written premium minus reinsurance” in the expense ratio and you add this to the loss ratio, you are going to get an error in your combined ratio, because the loss ratio will use the earned premium

By: Adam Bishop

Adam Bishop — Thu, 13 May 2010 14:17:50 +0000

I would say the second one certainly.

Best wishes,

Adam

By: faisal

faisal — Tue, 11 May 2010 23:30:55 +0000

Dear Adam,

Which is correct for managment expense ratio?

is it management expenses/net earned premium ie gross premium less reinsurance less(more) changes in unearned premium reserve
or

management expenses/net written premium ie gross premium less reinsurance

thanks

appreciate it a lot.

By: Adam Bishop

Adam Bishop — Fri, 26 Feb 2010 17:21:57 +0000

Hi Sundaram,

Thanks for your comment. The truth is that there is no “THE correct way” as such, insurance companies use a variety of methods – including those you describe – depending on the exact situation.

Certainly however you can create expense and combined ratios for different classes of business, in fact I’d recommend you do. Depending on the size of your operation and what you’re trying to achieve, calculating ratios across all classes of business alone may only be so useful; you also need to drill down into specific areas in order to know how those parts are performing.

The most important thing is to be consistent. Unless you compare apples to apples you’ll never know whether your operation is profitable or not. This means if you’re using Earned Premium in your calculations for one class, you must be careful do the same for the next and so on. It may sound obvious but mistakes are easily made.

If you’d like me to look at this in more detail for you, drop me a personal e-mail (you can contact me via the details you find on our About page) or add another comment. If you let me know what your ultimate goals are I’ll advise you on the best solution.

Best wishes,

Adam

By: SUNDARAM R M

SUNDARAM R M — Fri, 26 Feb 2010 07:30:05 +0000

Hi Adam
I find your How to’s writing interesting. I have read your “How to calculate Loss Ratio example” useful. However, can you giove examples of how you arrive at the expense ratio–Let me elaborate my doubt:

I believe the expense ratio is the ratio of management expenses divided by earned premium or gross premium { depending upon how you are calulating the loss ratio–based on either of these}–Correct me / advise me.

Further, if I asssume I am correct in the above, can I calculate the combined ratio for each class of business–say Property / Motor vehicle etc.separately? We can adopt different methods of apportioning the management expenses { since many of the expenses are common to all classes of business}–say based on Gross premium written / Net Written premium / Net EARNED premium ( before commission expenses) / Net Earned Premium after commission expenses,etc. I am not sure what would be THE correct method to use. Would be grateful for your advices.

Regards–Sundaram

By: Adam Bishop

Adam Bishop — Tue, 02 Feb 2010 14:32:02 +0000

You’re very welcome jonala234l. Let us know if there are any other technical topics you’d like us to cover.

By: jonala234l

jonala234l — Sun, 31 Jan 2010 21:54:56 +0000

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