This is calculated by dividing overall operating expenses (losses incurred + other operating expenses) by Premiums Earned, expressed as a percentage.
This metric is useful to determine and compare the profitability between insurance companies. A combined ratio of less than 100% means that the company is profitable, as its premiums earned are greater than its total expenses. For example, an insurer with $800 in expenses and $1,000 in premiums earned has a combined ratio of 80% (800/1000). However, companies with combined ratios over 100% may still earn a profit because the ratio does not account for Investment Income.
Lower combined ratios signal that the company is more profitable than competitors with higher combined ratios.