Combined Ratio after Policy Holder Dividends
Insurance policies always make sure that the coverage and the benefits will be accepted by the insured once a claim is being filed. Aside from making sure that the benefits are justifiable enough for the insured, the insurance company would also take into account the profits they made out from the business. Since this is a financial institution, they would also take into account the profits they made.
Combined ratio contains the profitability of an insurance company on how it performs in its operations. This is defined as the combined ratio equals the amount of the losses plus the amount of expenses divided by the earned premium accumulated during that time. The result is expressed in the form of percentage. . This percentage will consistently exhibit a combined ratio that is equal or less than 100%. Take into account that the result of the equation will describe the performance of the insurance company, so the percentage should not go beyond or below 100%. What does this indicate? A percentage below 100% implicates that the company is taking more than paying out or simple means they are making out underwriting profits while a percentage above 100% shows that the company is paying out more to the claims rather than receiving profits from the premium.
(Incurred Losses+Expenses)/Earned Premium
The combined ratio contains the amount of claim and the amount of expenses on ratio. The amount of claims or losses is the owed percentage of yield earned from premiums. The amount of expense ratio is the operation cost as a percentage of yields earned from premiums. Thus, to calculate the combined ratio, is taking the sum of the losses and expenses divided by the earned premium.
As for many insurance companies, the combined ratio is the way to measure on how far the company goes because this does not include the amount and number of investments; it contains solely the profit of the insurance company that is earned from the premium according to an efficient management.
Using the combined ratio is a good way to track the success of the company in the industry. For the company to maintain a profitable and a good service provider to its customers, the company should be able to take more yields from the customers’ premium payments than the pay outs. Premiums are one of the sources of income in most insurance companies and usually the best source of revenue. So make sure that the premiums are in smooth flow than the expenses to be able to make the company more stable for a long time.
If the insurance company would experience a combined ratio of equal or over 100% percent, the insurance company should take an action to remain the business in operation. Prior adjustments would be one of the best moves of the company in this case. This can be made by raising the premiums that may affect the degree of customer satisfaction. In the worst thing to happen is that customers might notice this change and the questions to be answered might get too long to obtain.
Combined ratio may be calculated on monthly or quarterly basis depending on the company’s policies. This is because it can provide information on the current time of success in writing new policies and how the current sales methods kick off in the market.