A way to measure the profitability of insurance companies. The combined ratio expresses a comparison between total costs and total revenue. Costs are derived by taking the losses incurred from paying out claims and adding this figure to the amount of the company's expenses. This sum is then divided by the revenue total.
The lower the combined ratio the more profitable the company. A number above one (meaning that the sum of incurred losses and expenses is higher than the amount of premiums earn) suggest a firm that is losing money.
An alternative to the combined ratio is the loss ratio. The loss ratio consists of incurred losses divided by earned premiums, leaving out the expense figure.