What is the total of the combined ratio made up of?

The combined ratio is an important metric used in the insurance industry to evaluate a company's financial performance, particularly in its underwriting activities. It is made up of the sum of the loss ratio and the expense ratio.

The loss ratio reflects the proportion of losses paid out in claims plus adjustment expenses compared to the total premiums earned. The expense ratio, on the other hand, indicates the costs associated with operating the insurance business, including administrative expenses and other operational costs, also measured against the total premiums earned.

When these two ratios are added together, they provide insight into the insurer's overall profitability from its core operations. A combined ratio under 100% generally indicates an underwriting profit, while a combined ratio over 100% suggests an underwriting loss.

The other options do not accurately represent how the combined ratio is calculated or its purpose. For instance, while the total of incurred losses and expenses may reflect the overall financial state, it does not break them down into the ratios necessary to determine the combined ratio specifically. Similarly, simply stating the relationship of premiums earned to claims incurred does not encapsulate the detailed analysis that the loss and expense ratios provide.