A FINANCIAL LOOK AT UNDERWRITING TO D A Y
The combined ratio is the single best measure of underwriting performance by property/ casualty insurers. As Figure 2 shows, it is a combination of two ratios: expenses to premiums and losses to premiums. (Various refinements, such as written vs.earned premiums, are not addressed in this discussion.) “Losses” are the cost of adjusting claims and the actual pay- ments to claimants. “Expenses” are basically everything else on which an insurer spends money. They include the cost of underwriting (underwriters, their equipment, systems, office space, and so on). They also include all other expenses incurred by an insurance company, from HR and accounting to general management, etc.
Figure 2: A Combination of Two Ratios
As Figure 3 shows, in 2002 the combined ratio for U.S. personal lines was 104.2. That is, for every dollar of premium insurers took in, they paid out just over $1.04: an estimated 2 cents for underwriting expenses, 22.5 cents for all other expenses; and 80 cents for losses. P/C insurers can no longer count on investment income overcoming underwriting losses. Betting
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