What determines an insurer's profitability according to the combined ratio?

The combined ratio is a key measure used in the insurance industry to evaluate an insurer's profitability. It is calculated by adding the loss ratio and the expense ratio. The loss ratio represents the percentage of premiums taken in that are paid out in claims, while the expense ratio reflects the costs associated with underwriting and administering the insurance policies.

When the combined ratio is less than 100%, it indicates that the insurer is making a profit from its underwriting activities, as it is paying out less in claims and expenses than it is earning in premiums. Conversely, a combined ratio above 100% suggests that the insurer's losses and expenses exceed its earned premiums, leading to a financial loss.

This understanding of the combined ratio highlights how essential it is for insurers to manage both claims and operational costs efficiently. The analysis of these two components allows insurers to gauge their performance in a clear and quantifiable way, ensuring their long-term sustainability and profitability in the market.