Combined Ratio (P&C)

Combined Ratio (P&C)

KPI Details

Combined Ratio is a common, vital indicator of a property and casualty (P&C) insurance company's profitability. The factors impacting Combined Ratio are simple - premium earned, losses paid out and operating expenses. As one would expect, losses paid out and operating expenses should be kept to a minimum, while earned premium should be maximized. There are countless factors that can impact Combined Ratio: claims leakage, a spike in catastrophe losses, outdated or ineffective underwriting rules, lack of discipline within the company's sales force, lack of strategic direction, subpar customer service and retention, and waste within support and administrative functions of the business (e.g., finance, HR, IT, etc.) can move the needle significantly in terms of Loss Ratio and Underwriting Expense Ratio (and consequently, Combined Ratio).

KPI Definition

P&C Insurance Combined Ratio is the sum of Loss Ratio (claims paid out divided by premium earned) and Underwriting Expense Ratio (cost of sales, underwriting and customer service divided by premium earned). This ratio is a basic measure of an insurance company's overall profitability.

KPI Best Practices

• Provide superior customer service to increase policy retention rate
• Review underwriting rules regularly to ensure they align with company goals and adhere to industry changes
• Claims function is staffed appropriately,controlling loss adjustment expenses

KPI Calculation Instructions Combined Ratio (P&C)?

Two aggregate values are used to calculate this KPI: (1) the insurance company’s P&C Loss Ratio, and (2), the company’s P&C Underwriting Expense Ratio. Loss Ratio is calculated by dividing the sum of total claims paid out and loss adjustment expense (loss + LAE expense) by total premium earned over the same period of time. Underwriting Expense Ratio is calculated by dividing total operating expense (not including loss and LAE expense) by premium earned over the same period of time. Combined Ratio is simply the sum of these two values (Loss Ratio + Underwriting Expense Ratio).

KPI Formula :

((Total P&C Claims Losses + Total P&C Operating Expense) / P&C Premium Earned) * 100