What does "combined ratio" measure in terms of an insurance company's performance?

The combined ratio is an essential metric used to evaluate the profitability of an insurance company, specifically in the context of its underwriting performance. It is calculated by adding the loss ratio (which measures the losses paid out in claims relative to the premiums earned) and the expense ratio (which assesses the operational and administrative costs against the premiums earned).

When the combined ratio is below 100%, it indicates that the company is making an underwriting profit, as it is paying out less in claims and expenses than it is receiving in premiums. Conversely, a combined ratio above 100% suggests that the company is underwriting at a loss, paying out more in claims and expenses than it collects in premiums. Thus, a lower combined ratio generally reflects a more profitable insurance operation, making this metric crucial for performance assessment.