Combined Ratio

The combined ratio is the loss ratio plus the expense ratio: total claims and total costs, both measured against net earned premium, added into a single percentage. It is the one-number verdict on an insurer's underwriting — the general-insurance answer to what NIM is for a bank.

The magic is the 100% line. Below 100%, the insurer collected more premium than it paid out in claims and expenses, and it made a profit on insurance itself. Above 100%, it paid out more than it took in, and lost money on the core business before any investment income. A combined ratio of 95% means five paise of underwriting profit on every rupee earned; 108% means eight paise of underwriting loss. Note the inverted polarity against a bank: for NIM, higher is better; for the combined ratio, lower is better, and crossing 100% is the whole game. The uncomfortable truth of Indian general insurance is that most players run above 100% — they lose money on underwriting and are rescued by the second engine, the invested float. A reader who only tracks premium growth misses this completely.

Take the insurer with ₹100 crore of net earned premium:

Component	Amount	As % of NEP
Claims incurred	₹70 cr	70% (loss ratio)
Commissions + operating expenses	₹35 cr	35% (expense ratio)
Total outgo	₹105 cr	105% (combined ratio)

The insurer earned ₹100 crore and spent ₹105 crore paying claims and running the book. For every ₹100 of premium, ₹105 went out — a 5% underwriting loss. That is a combined ratio of 105% — roughly where a lot of the Indian private general-insurance industry actually sits (the public-sector insurers run materially higher, well above 120%). (Illustrative — combined ratios vary widely by insurer and line; confirm against current disclosures.)

Now the reframe that makes insurance make sense: this company is not necessarily unprofitable. It is losing ₹5 crore on underwriting, but it has been holding policyholders' money — the float — and earning investment income on it. If that investment income is more than ₹5 crore, the insurer still turns a net profit despite a combined ratio above 100%. The combined ratio tells you the first engine is running at a loss; whether the company makes money depends on how hard the second engine works.

The combined ratio is a percentage; the next step converts it to money. The underwriting result is simply (100% − combined ratio) × net earned premium — here, −5% × ₹100 crore = a ₹5 crore underwriting loss. That result is the first of the insurer's two profit engines to reach net profit. The second, investment income on the float, is what decides whether an above-100% combined ratio still ends in a profit. The combined ratio is also the headline figure when you sit down to read an insurer's results.