Combined Operating Ratio Calculator

The Combined Operating Ratio Calculator is a financial tool designed for the insurance industry to measure a company’s operational efficiency and profitability. It combines the combined loss ratio and the expense ratio to provide a holistic view of an insurer’s performance in managing claims, underwriting, and administrative costs relative to earned premiums. A ratio below 100% indicates profitability, while a ratio above 100% suggests losses.

This tool belongs to the insurance financial performance calculators category and is widely used by actuaries, financial analysts, and insurance executives to assess underwriting profitability and operational effectiveness.

Formula of Combined Operating Ratio Calculator

Main Formula

Combined_operating_ratio = Combined_loss_ratio + Expense_ratio

Where:

• Combined_operating_ratio = expressed as a percentage.
• Combined_loss_ratio = percentage of claims and underwriting losses relative to earned premiums.
• Expense_ratio = percentage of underwriting expenses relative to earned premiums.

Dependent Variable Formulas

1. Combined Loss Ratio:
   Combined_loss_ratio = (Claims_paid / Earned_premiums) × 100
   • Claims_paid = total amount of claims paid by the insurer.
   • Earned_premiums = total premiums earned during the period.
2. Expense Ratio:
   Expense_ratio = (Underwriting_expenses / Earned_premiums) × 100
   • Underwriting_expenses = total expenses related to policy issuance and administration.
   • Earned_premiums = total premiums earned during the period.
3. Expanded Formula:
   Combined_operating_ratio = [(Claims_paid / Earned_premiums) + (Underwriting_expenses / Earned_premiums)] × 100

Pre-Calculated Table for Common Scenarios

Here’s a table showcasing typical combined operating ratios for various values of combined loss ratios and expense ratios:

Combined Loss Ratio (%)	Expense Ratio (%)	Combined Operating Ratio (%)
60	30	90
70	25	95
65	35	100
55	20	75
80	30	110

This table provides a quick reference to analyze operational performance based on these ratios.

Example of Combined Operating Ratio Calculator

Problem

An insurance company has the following financial details:

• Claims Paid: $1,500,000.
• Underwriting Expenses: $500,000.
• Earned Premiums: $2,500,000.

Step 1: Calculate the Combined Loss Ratio

Combined_loss_ratio = (Claims_paid / Earned_premiums) × 100
Combined_loss_ratio = (1,500,000 / 2,500,000) × 100 = 60%.

Step 2: Calculate the Expense Ratio

Expense_ratio = (Underwriting_expenses / Earned_premiums) × 100
Expense_ratio = (500,000 / 2,500,000) × 100 = 20%.

Step 3: Calculate the Combined Operating Ratio

Combined_operating_ratio = Combined_loss_ratio + Expense_ratio
Combined_operating_ratio = 60% + 20% = 80%.

Interpretation

The combined operating ratio of 80% indicates that the insurer is operating profitably, retaining 20% of earned premiums for reserves or profit.

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