Which statement best describes what the Combined Ratio measures?

Which statement best describes what the Combined Ratio measures?

• A. It measures underwriting profitability by combining loss and expense ratios
• B. It measures liquidity
• C. It measures investment return
• D. It measures solvency only

Answer: (A)

The combined ratio measures underwriting profitability by adding the loss ratio and the expense ratio. The loss ratio shows claims paid and claims incurred relative to net earned premiums, while the expense ratio captures underwriting expenses relative to net earned premiums. When you sum them, you get a clear picture of whether the underwriting operations cover their costs from the premiums earned. If the result is under 100%, underwriting is profitable; if over 100%, there’s an underwriting loss. It does not reflect liquidity, investment return, or solvency, since those involve cash flow, investment income, and capital adequacy rather than the costs of claims and underwriting expenses.

The combined ratio measures underwriting profitability by adding the loss ratio and the expense ratio. The loss ratio shows claims paid and claims incurred relative to net earned premiums, while the expense ratio captures underwriting expenses relative to net earned premiums. When you sum them, you get a clear picture of whether the underwriting operations cover their costs from the premiums earned. If the result is under 100%, underwriting is profitable; if over 100%, there’s an underwriting loss. It does not reflect liquidity, investment return, or solvency, since those involve cash flow, investment income, and capital adequacy rather than the costs of claims and underwriting expenses.