What the combined ratio measures, statutory vs GAAP expense ratios, and how investment income turns into the operating ratio.
The combined ratio adds the loss ratio and the expense ratio. Below 100% an insurer makes money on underwriting; above 100% it pays out more in claims and expenses than it collects in premium.
A 96% combined ratio means four cents of underwriting profit on every premium dollar.
Loss and LAE ratio: incurred losses plus loss adjustment expense, divided by earned premium.
Expense ratio: commissions, premium taxes, acquisition and general expenses. On a statutory (trade) basis these are divided by written premium, because they are incurred when policies are written. On a GAAP basis they are divided by earned premium.
Dividend ratio: policyholder dividends divided by earned premium, for companies that pay them.
Insurers hold premium before paying claims and invest it. The operating ratio subtracts net investment income as a percentage of earned premium from the combined ratio. A carrier can run a 101% combined ratio and still be profitable if investment income is strong — but that cushion shrinks when interest rates fall.
Carrier appetite follows the combined ratio. When a line’s combined ratio climbs above 100%, rate increases, tighter underwriting and non-renewals follow. Understanding the ratio helps you explain a hard market to clients before the renewal arrives.