Loss Ratio, Expense Ratio and Combined Ratio: Formulas, Examples and Benchmarks

On this page (11)

1. TL;DR
2. Worked example: one book of business, three ratios
3. How do you calculate the loss ratio?
4. How do you calculate the expense ratio?
5. How do you calculate the combined ratio?
6. Statutory, GAAP and trade basis: why the same insurer shows different ratios
7. What is a good loss ratio and combined ratio by line?
8. Why can a combined ratio over 100% still be profitable?
9. Where these ratios show up in insurance work
10. What is the medical loss ratio (MLR)?
11. FAQs

TL;DR

• The combined ratio is an insurer's losses, loss adjustment expenses (LAE) and underwriting expenses as a percentage of premium: the loss ratio plus the expense ratio. Below 100% means an underwriting profit; above 100% means an underwriting loss.
• Loss ratio = (incurred losses + LAE) ÷ earned premium. Expense ratio = underwriting expenses ÷ written premium on a trade basis, or ÷ earned premium on a statutory basis.
• The US property and casualty industry ran a 92.9% combined ratio in 2025 (66.5% loss and LAE, 25.8% expense, 0.6% policyholder dividends), down from 96.9% in 2024, according to the NAIC.
• A combined ratio over 100% can still be profitable overall, because insurers earn investment income on premiums and reserves they hold. The industry ran 101.7% in 2023 and still reported $87.3 billion of net income.
• The medical loss ratio (MLR) is a different rule: ACA health insurers must spend at least 80% (individual and small group) or 85% (large group) of adjusted premium on claims and quality improvement, or pay rebates.

The loss ratio, expense ratio and combined ratio are how insurers, regulators and rating agencies measure underwriting results. The loss ratio is the share of premium that goes to claims and the cost of settling them. The expense ratio is the share spent on getting and servicing the business: commissions, premium taxes, salaries and overhead. Add them together and you have the combined ratio. Under 100% means the insurer took in more premium than it paid out on that business, before counting any investment income.

Worked example: one book of business, three ratios

Example (made-up round numbers): a carrier writes a commercial book with $10 million of earned premium in a year. It records $5.8 million of incurred losses, $0.7 million of loss adjustment expense (LAE) and $3 million of underwriting expenses.

Line item	Amount	Ratio	How it’s calculated
Earned premium	$10,000,000	100%	The base for the ratios
Incurred losses	$5,800,000	58.0%	Pure loss ratio: losses ÷ earned premium
Loss adjustment expense	$700,000	7.0%	LAE ÷ earned premium
Loss and LAE ratio	$6,500,000	65.0%	(Losses + LAE) ÷ earned premium
Underwriting expenses	$3,000,000	30.0%	Expense ratio: expenses ÷ earned premium
Combined ratio	$9,500,000	95.0%	Loss and LAE ratio + expense ratio
Underwriting profit	$500,000	5.0%	100% minus the combined ratio

The calculator below starts with the same figures. Change any input to see the three ratios move. If you fill in written premium, it switches the expense ratio to the trade basis described further down.

CalculatorLoss, expense and combined ratio

Earned premium Incurred losses Loss adjustment expense (LAE) Underwriting expenses Written premium optional

Loss ratio–(losses + LAE) ÷ earned premium

Expense ratio–expenses ÷ earned premium

Combined ratio– 

How do you calculate the loss ratio?

The loss ratio compares what an insurer pays (and expects to pay) on claims to the premium it has earned. The Casualty Actuarial Society’s ratemaking text defines it as losses divided by premium. It notes that the usual inputs are reported (incurred) losses and earned premium, and that many companies fold LAE into the numerator and call the result a loss and LAE ratio (CAS, Basic Ratemaking).

Three inputs need defining before two loss ratios can be compared:

• Incurred losses are what has been paid on claims plus what is still held in reserve on open ones. Because reserves change as claims develop, the loss ratio for a recent year is an estimate that can move. The loss run guide covers how paid, reserved and incurred figures show up on an account’s claims history.
• Earned premium is the part of written premium that corresponds to coverage already provided. A 12-month policy written on July 1 for $1,200 has earned $600 by December 31.
• LAE is the cost of handling claims. The CAS text splits it into allocated LAE (costs tied to a specific claim, such as outside defense counsel) and unallocated LAE (costs such as claims department salaries). It also notes that US statutory reporting uses a different split: defense and cost containment (DCC) and adjusting and other (A&O).

Watch for one more variation. The CAS text also defines an “LAE ratio” as LAE divided by losses, not premium. In the example, that is $0.7 million ÷ $5.8 million, or 12.1%. It is a claims-cost measure and does not add to the loss ratio.

How do you calculate the expense ratio?

The expense ratio is the share of premium spent on acquiring, writing and servicing policies. IRMI’s definition gives two versions. On a trade basis, expenses are divided by written premium. On a statutory basis, they are divided by earned premium. IRMI says the written-premium version is the more common one (IRMI).

The reason for the written-premium version is timing. The CAS text explains that commissions, other acquisition costs and taxes, licenses and fees are mostly incurred when a policy starts, so they are measured against written premium. General expenses accrue across the policy term, so they are measured against earned premium. Some companies calculate each category separately and add them up.

The basis matters most when a book is growing or shrinking. In the example, if the carrier wrote $10.5 million while earning $10 million, its expense ratio is 28.6% on a trade basis and 30.0% on a statutory basis. A fast-growing MGA program or new carrier can look expensive on earned premium in its first years, because it pays commissions upfront on premium it has not yet earned.

The NAIC’s industry figures use written premium. In its 2025 snapshot, $252.2 billion of other underwriting expenses against $976.8 billion of net premiums written works out to the published 25.8% expense ratio (NAIC 2025 snapshot).

How do you calculate the combined ratio?

The combined ratio adds the two together. IRMI describes it as incurred losses plus LAE divided by earned premium, plus all other expenses divided by written or earned premium, and notes that a result below 100% indicates an underwriting profit (IRMI).

The CAS text warns about double counting: if LAE sits inside the loss ratio, it must stay out of the expense side. Mutual insurers and some workers’ compensation writers also pay policyholder dividends, and the NAIC reports them as a third component. Its 2025 industry combined ratio of 92.9% is 66.5% loss and LAE, plus 25.8% expense, plus 0.6% dividends.

Statutory, GAAP and trade basis: why the same insurer shows different ratios

The same company can report two combined ratios for one year, and an analyst’s third version may not match either.

Basis	Used for	Expense ratio denominator	Acquisition costs
Statutory	Annual statements filed with state regulators; NAIC industry data	The NAIC’s industry figures divide by written premium; IRMI’s “statutory basis” definition uses earned premium	Expensed when the policy is written
GAAP	Investor reporting in 10-Ks and earnings releases	Earned premium in AFG’s 10-K, for example	Deferred and spread over the policy term

Statutory accounting exists for solvency regulation. The NAIC says it focuses on the balance sheet and an insurer’s ability to meet its obligations, while GAAP is aimed at investors and the income statement (NAIC). Under statutory accounting, acquisition costs are expensed at inception, which reduces surplus straight away (IRMI). Under GAAP, American Financial Group’s 10-K describes deferring the commissions, premium taxes and certain underwriting and issuance costs tied to writing or renewing a policy, then charging them against income over the policy term.

Real filings show the gap is usually small. American Financial Group’s 2025 10-K reports a 91.0% GAAP combined ratio (62.2% loss and LAE, 28.8% underwriting expense, each divided by net earned premium) and a 91.3% statutory combined ratio (61.0% and 30.3%) (AFG 10-K). When comparing carriers, line up the same basis first.

What is a good loss ratio and combined ratio by line?

Below 100% combined is an underwriting profit. Beyond that, a “good” ratio depends on the line, because lines differ in how much goes to claims, how much goes to commissions, and how long the insurer holds the money.

The NAIC’s 2025 full-year report gives these figures for the US P&C industry (NAIC 2025 results):

Segment or line (2025)	Ratio	Measure
All P&C lines	92.9% (96.9% in 2024)	Combined ratio
All P&C lines	66.5% (71.2% in 2024)	Net loss and LAE ratio
Personal lines	89.1% (96.0% in 2024)	Combined ratio
Professional reinsurers	97.7% (65.3% loss, 32.4% expense)	Combined ratio
Homeowners	53.5%	Pure net loss ratio
Personal auto physical damage	52.6%	Pure net loss ratio
Personal auto liability	68.1%	Pure net loss ratio
Commercial multiple peril, non-liability	43%	Pure net loss ratio
Workers’ compensation	48%	Pure net loss ratio
Other liability, occurrence	67%	Pure net loss ratio
Commercial auto liability	71%	Pure net loss ratio

Read the line figures with care. A pure net loss ratio leaves out LAE and all underwriting expenses, so a 53.5% homeowners loss ratio does not mean a 46.5% margin. The NAIC also credits much of 2025’s improvement to a year without a US hurricane landfall and to favorable reserve development, so a single year is a weak benchmark. Its report flags social inflation as a continuing pressure on commercial auto and liability lines.

Published industry ratios also change as filings come in. AM Best’s 2026 Review & Preview figures, as quoted in AFG’s 10-K, put the 2025 all-lines statutory combined ratio at 95.0% and commercial lines at 95.8%, against the NAIC’s 92.9% from filed statements.

Why can a combined ratio over 100% still be profitable?

The combined ratio measures underwriting only. An insurer’s total profit is underwriting profit plus investment income, as the CAS ratemaking text puts it. Insurers invest the unearned premium and loss reserves they hold until claims are paid.

How much that helps depends on how long claims take to settle. The CAS text gives short-tail lines such as auto collision and homeowners as cases where the money is held briefly. In long-tail lines such as auto bodily injury and workers’ compensation, years can pass before every claim is settled. For some long-tail lines, it says, investment income can be large enough that a company can accept an underwriting loss and still reach its target return.

The industry figures show it. The NAIC’s snapshot reports a 101.7% combined ratio for 2023, a $19.7 billion underwriting loss, and $87.3 billion of net income. Net investment income of $70.3 billion and $50.5 billion of realized gains covered the underwriting loss. In 2022 the combined ratio was 102.5% and net income was $38.7 billion.

Example (made-up round numbers): a workers’ compensation writer with $10 million of earned premium runs a 103% combined ratio, a $300,000 underwriting loss. If it earns $600,000 investing reserves and unearned premium, it still makes $300,000 before tax.

Where these ratios show up in insurance work

• Pricing and rate filings. In the CAS framework, a rate indication compares projected losses and LAE to a permissible loss ratio: 1.0 minus the expense provision minus the target profit. A line with a 30% expense load and a 5% profit target has a 65% permissible loss ratio. Actuarial pricing platforms such as Akur8, Earnix and Guidewire PricingCenter are built around that rate-making work; see the rating and pricing software list.
• Underwriting individual accounts. Commercial underwriters read an account’s own loss ratio from its loss runs. Getting those claims into a usable format is a document job; see loss run parsing software. For workers’ compensation, the experience modification rate does a similar job with a formula set by the rating bureau.
• Portfolio steering. Underwriting managers track loss ratios by class, territory and producer to decide where to grow. The underwriting workbench list and the AI underwriting guide cover the software that brings those numbers into the underwriter’s queue.
• Claims operations. LAE is the cost of handling claims, from adjusters’ salaries to defense counsel, so claims department efficiency shows up directly in the loss and LAE ratio. See claims management software.

What is the medical loss ratio (MLR)?

The medical loss ratio is a federal rule for health insurers, not a P&C metric. CMS says the Affordable Care Act requires insurers to spend at least 80% or 85% of premium dollars on medical care, and to pay rebates when they fall short (CMS). The regulation sets 85% for the large group market and 80% for the small group and individual markets, and lets HHS adjust the individual market standard for a particular state (45 CFR 158.210).

It differs from a P&C loss ratio in four ways:

1. The numerator adds quality improvement spending to incurred claims (45 CFR 158.221).
2. The denominator removes taxes and regulatory fees from premium, after risk adjustment, risk corridor and reinsurance amounts.
3. It averages three years: the reporting year plus the two before it (45 CFR 158.220).
4. Falling short costs money. Rebates go to enrollees by September 30 after the reporting year, sized by the gap between the required and actual MLR (45 CFR 158.240). Example (made-up round numbers): an individual-market insurer with a 77% three-year MLR and $50 million of adjusted premium is 3 points short of 80% and owes about $1.5 million in rebates.

Medicare Advantage has its own 85% minimum. A contract below it remits the difference to CMS. After three consecutive years below, CMS stops new enrollment, and after five it terminates the contract (42 CFR 422.2410).

FAQs

What is a good combined ratio for an insurance company?

Anything below 100% is an underwriting profit. For context, the NAIC reports a 92.9% combined ratio for the whole US property and casualty industry in 2025 and 96.9% in 2024. A good figure depends on the line: long-tail liability lines can run closer to 100% and still meet return targets because of investment income, while short-tail property lines need more underwriting margin.

How do you calculate a loss ratio?

Divide incurred losses by earned premium. Most published loss ratios also include loss adjustment expenses (LAE) in the numerator, so the formula becomes (incurred losses + LAE) ÷ earned premium. Example: $5.8 million of losses and $0.7 million of LAE on $10 million of earned premium is a 65% loss and LAE ratio.

Does the loss ratio include loss adjustment expenses?

It depends on who publishes it. The NAIC's industry loss ratio and most carrier combined ratios include LAE. A pure loss ratio leaves LAE out. The CAS ratemaking text says to state the inputs, because if LAE sits in the loss ratio it must not be counted again in the expense ratio.

Why is the expense ratio divided by written premium?

Commissions, premium taxes and other acquisition costs are mostly spent when a policy is written, so dividing them by written premium matches cost to the premium that triggered it. This is called the trade basis. Dividing by earned premium instead is the statutory basis. For a book that is not growing or shrinking, the two give similar answers.

Can an insurer make money with a combined ratio over 100%?

Yes. The combined ratio measures underwriting only. Insurers also invest the premiums and loss reserves they hold, and in long-tail lines such as workers' compensation that money can be held for years. The NAIC's figures show the US P&C industry with a 101.7% combined ratio and an underwriting loss in 2023, alongside $87.3 billion of net income.

What is the difference between the loss ratio and the medical loss ratio?

The P&C loss ratio is a profitability measure that insurers and analysts calculate in different ways. The medical loss ratio is a federal rule for health insurers under the ACA: it adds quality improvement spending to claims, subtracts taxes and fees from premium, averages three years, and requires rebates when the result falls below 80% or 85%.

What is the difference between the GAAP and statutory combined ratio?

Statutory accounting, which insurers file with state regulators, expenses acquisition costs such as commissions when the policy is written. GAAP spreads them over the policy term through deferred acquisition costs, and carriers' GAAP expense ratios are often divided by earned premium. The two ratios are usually close: one carrier's 2025 10-K shows 91.0% on GAAP and 91.3% on a statutory basis.