How is the combined ratio in insurance calculated?
| Component | Amount | Ratio to revenue of 1,000 |
|---|---|---|
| Claims incurred, discounted, with risk adjustment | 620 | Loss ratio 62% |
| Attributable expenses | 180 | Expense ratio 28% |
| Amortised acquisition cash flows | 100 | |
| Net expense from reinsurance held | 40 | Reinsurance ratio 4% |
| Total | 940 | Combined ratio 94% |
The insurer makes an underwriting margin of 6% of revenue before investment income. If its claims were measured undiscounted at 650, as under the old basis, the combined ratio would be 97%: discounting long-tail claims flatters the IFRS 17 ratio, so some insurers also report an undiscounted ratio.
What did IFRS 17 change?
- Revenue replaces earned premium: similar for short-tail business, but excluding investment components and including some adjustments.
- Claims are discounted and include a risk adjustment, with the unwinding of the discount in insurance finance expense, outside the combined ratio.
- Non-attributable expenses, such as some head office costs, sit outside the insurance service result, so a combined ratio built from IFRS 17 lines may exclude costs the old ratio included.
- Onerous contract losses appear in insurance service expenses when they arise.
How does prior-year development affect the ratio?
Suppose the insurer in the example also released 30 of reserves for earlier accident years, because claims settled for less than estimated. The release reduces insurance service expenses, so the reported combined ratio falls from 94% to 91%. Many insurers therefore report a current accident year combined ratio as well, excluding prior-year development, to show how the year's own business performed. A run of large releases can flatter results; a run of strengthening suggests reserves were set too low.
How does the combined ratio relate to the insurance service result?
Closely: an insurance service result of 60 on revenue of 1,000, after the net reinsurance expense, corresponds to a combined ratio of 94%. The insurance service result is an IFRS 17 line in the income statement; the combined ratio expresses it, with the insurer's chosen adjustments, as a percentage of revenue. Insurance finance income and expenses and investment income sit outside both.
Why do insurers' combined ratios differ?
IFRS 17 does not define the combined ratio, so each insurer chooses: gross or net of reinsurance, discounted or undiscounted, with or without non-attributable expenses, and whether to adjust for one-off catastrophe losses or prior-year reserve releases. Comparing insurers needs their definitions side by side. Under IFRS 18 from 2027, a ratio is not itself a management-defined performance measure, but an adjusted subtotal used to build it may be.
Which other KPIs do insurers report?
- Prior-year development: releases or strengthening of reserves for earlier accident years, which can move the combined ratio by several points.
- Catastrophe losses as a percentage of revenue.
- For life insurers: the CSM, new business CSM and its margin, and the CSM release; see the contractual service margin.
- Solvency ratio: regulatory capital against requirements, under rules such as Solvency II rather than IFRS.
- Return on equity and operating profit, often adjusted for market movements.
How should readers use the combined ratio?
Alongside the investment result, because an insurer with a 102% combined ratio can still be profitable if it earns enough on the premiums it holds, especially on long-tail business. The trend over several years, and the effect of reserve releases and catastrophes, matter more than any one year's figure. See IFRS 17 disclosures and insurance accounting under IFRS 17.
Need help applying the standards?
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Questions people ask
What is the combined ratio in insurance?
Claims and expenses, usually including the net cost of reinsurance, as a percentage of insurance revenue; below 100% means an underwriting profit.
How is the combined ratio calculated under IFRS 17?
Most insurers use insurance service expenses plus the net expense from reinsurance held, divided by insurance revenue, but definitions vary.
Why did IFRS 17 lower some combined ratios?
Because claims are discounted and some non-attributable expenses fall outside the insurance service result.
Is the combined ratio defined by IFRS?
No. Insurers define it themselves, so definitions must be checked before comparing.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.
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This guide is general information. It is not tax or legal advice for your situation.