What is the combined ratio primarily used to measure in insurance companies?

The combined ratio is a crucial metric used to assess the profitability of an insurance company's underwriting activities. It represents the sum of the loss ratio (claims paid out in relation to earned premiums) and the expense ratio (operating costs related to writing and administering insurance policies). A combined ratio below 100% indicates that the company is making an underwriting profit, while a ratio above 100% signifies an underwriting loss.

By focusing on the relationship between premiums earned and losses incurred, the combined ratio provides a clear picture of how effectively an insurance company is managing its core operations, including underwriting policies and claims processing. Therefore, using the combined ratio to measure profitability is fundamental for insurance companies to evaluate their performance and financial health over time. This metric becomes an essential tool for comparability within the industry and aids in strategic decision-making.