What components make up an insurer's combined ratio, which affects its profitability?

The combined ratio is a key metric used in the insurance industry to evaluate an insurer's profitability, specifically in the underwriting process. It is calculated by adding together the loss ratio and the expense ratio.

The loss ratio measures the losses incurred by an insurer in relation to the premiums collected. It reflects the claims paid by the insurer divided by the total premiums earned, providing insight into how effectively the insurer is managing its claims payouts. On the other hand, the expense ratio looks at the insurer's operational costs — which include administrative expenses, commissions, and other costs — in relation to earned premiums. By combining these two ratios, the combined ratio offers a comprehensive view of how well an insurance company is performing from an underwriting standpoint.

A combined ratio of less than 100% indicates that the insurer is making an underwriting profit, while a ratio above 100% suggests an underwriting loss, which can significantly impact the company's overall profitability. Thus, understanding and analyzing the combined ratio is crucial for stakeholders assessing the financial health of an insurance company.