Loss ratio & combined ratio

This is the hinge metric of the entire Glacis MGA strategy. If you internalize one number, make it the loss ratio. All STABLE.

The three ratios

   Loss ratio      =  incurred losses        ÷ earned premium
   Expense ratio   =  underwriting expenses  ÷ premium
   Combined ratio  =  loss ratio + expense ratio

• Loss ratio — what fraction of premium is paid out in losses (claims + loss adjustment expense). Lower is better.
• Expense ratio — what fraction goes to running the business (commissions, overhead, acquisition costs).
• Combined ratio — the two added together:
  • < 100% → underwriting profit (you collected more than you paid out + spent).
  • > 100% → underwriting loss (which may be offset by investment income, but you lost money on the insurance itself).

Worked example

A program earns $10,000,000 in premium, pays $6,500,000 in losses, and spends $3,000,000 on expenses.

Loss ratio	6,500,000 ÷ 10,000,000	65%
Expense ratio	3,000,000 ÷ 10,000,000	30%
Combined ratio	65% + 30%	95% — a 5% underwriting PROFIT

If losses had instead been $8,000,000:

Loss ratio		80%
Combined ratio	80% + 30%	110% — a 10% underwriting LOSS

The difference between a healthy and an unhealthy program is the loss ratio — which is exactly what risk selection, classification, and rating control.

Two refinements you’ll see

• LAE (Loss Adjustment Expense) — the cost of investigating and settling claims; rolled into the loss number (sometimes split into allocated/unallocated).
• IBNR (Incurred But Not Reported) — reserves for losses that have happened but haven’t been reported yet. Crucial for claims-made/long-tail lines like E&O, where claims surface long after the event. See 02 E&O / professional liability.

The economic connection

Contingent compensation may depend on agreed loss experience and contract terms. Actual results, development, expenses and capital matter. A control or evidence packet does not establish a better loss ratio, guaranteed profit share or additional capacity. See the evidence-to-underwriting loop for the validation needed. STABLE

The worked example above is synthetic arithmetic, not a Glacis operating result. Expense and loss-ratio accounting bases can differ; identify the basis in a real report.

Connections

• The loss ratio is governed by 01 Risk selection and 02 Rating & pricing.
• A bad loss ratio drives the market into a hard phase — see 05 The underwriting cycle.
• Capacity providers (reinsurers) watch it closely — see 04 Reinsurance & capacity.

Next

→ 04 Reinsurance & capacity

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