Loss Ratio and Combined Ratio
How much of each ₹100 of premium goes on claims, and on everything else.
The loss ratio answers one question: out of every ₹100 of premium an insurer earned, how much went on claims? In India it is usually called the incurred claims ratio (ICR). Add what the insurer spent on commission and running the business, and you get the combined ratio. Below 100%, the insurance business itself made money; above 100%, it lost money on underwriting and needs investment income to stay profitable.
These ratios are how underwriters judge a portfolio, how reinsurers price treaties, and how IRDAI and analysts compare insurers. They are different from the claim settlement ratio, which counts how many claims were paid, not what they cost.
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The Definitions IRDAI Uses
- Net incurred claims
- Claims paid (net of reinsurance) during the year, plus outstanding claims including IBNR at the end of the year, minus outstanding claims including IBNR at the start.
- Net earned premium
- Net written premium (after reinsurance ceded) adjusted for the change in the unexpired risk reserve during the year.
- Net incurred claims ratio (loss ratio)
- Net incurred claims ÷ net earned premium.
- Net commission ratio
- Net commission ÷ net premium.
- Expense ratio
- Operating expenses ÷ gross written premium.
- Combined ratio
- Net commission ratio + expense ratio + net incurred claims ratio.
Worked Example
A mid-sized insurer's motor portfolio, figures as illustrations, all in ₹ crore.
- 1
Earned premium
Net written premium 1,050, increase in unexpired risk reserve 50, so net earned premium = 1,000.
- 2
Incurred claims
Net claims paid 700, closing outstanding including IBNR 600, opening outstanding including IBNR 470. Net incurred = 700 + 600 − 470 = 830. Loss ratio = 830 ÷ 1,000 = 83%.
- 3
Commission and expenses
Net commission 105 on net premium 1,050 = 10%. Operating expenses 204 on gross written premium 1,200 = 17%.
- 4
Combined ratio
10% + 17% + 83% = 110%. The portfolio lost about ₹10 on underwriting for every ₹100 of premium, before investment income on the reserves it holds.
What the Industry Looks Like
Net incurred claims ratio of non-life insurers, as published in IRDAI's Annual Report 2024-25.
Fire
2023-24
78.33%
2024-25
72.93%
Marine
2023-24
72.39%
2024-25
73.63%
Motor
2023-24
81.98%
2024-25
85.51%
Health
2023-24
86.35%
2024-25
85.34%
Public sector general insurers (all lines)
2023-24
97.23%
2024-25
97.30%
Private sector general insurers (all lines)
2023-24
76.49%
2024-25
77.50%
Whole non-life industry
2023-24
82.52%
2024-25
82.88%
| Segment or sector | 2023-24 | 2024-25 |
|---|---|---|
| Fire | 78.33% | 72.93% |
| Marine | 72.39% | 73.63% |
| Motor | 81.98% | 85.51% |
| Health | 86.35% | 85.34% |
| Public sector general insurers (all lines) | 97.23% | 97.30% |
| Private sector general insurers (all lines) | 76.49% | 77.50% |
| Whole non-life industry | 82.52% | 82.88% |
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Reading the Ratios Correctly
- check_circlePaid ratio vs incurred ratio: a paid loss ratio ignores outstanding claims and IBNR, so it flatters a young or fast-growing book. The incurred ratio is the honest one.
- check_circleThe denominators differ: claims are measured against earned premium, commission against net premium, and expenses against gross written premium. Adding them is a convention, not exact arithmetic.
- check_circleWhen the loss ratio alone is in the 80s, as the industry's was in 2024-25, little room is left for commission and expenses. Insurers then lean on investment income on their reserves; IRDAI's glossary defines insurance profit as underwriting profit plus that investment income.
- check_circleWhere to find them: IRDAI's annual report publishes incurred claims ratios by segment and by insurer, and each insurer's published financial statements give the numbers to compute its own.
How IC-11 Tests This
Expect the formula questions: loss ratio is incurred claims over earned premium, not over written premium; combined ratio is loss ratio plus expense and commission ratios; a combined ratio above 100% means an underwriting loss. The trap is the claim settlement ratio, which counts claims paid by number and belongs to a different question.
FAQs
What is the incurred claims ratio in general insurance?expand_more
Net incurred claims divided by net earned premium. Incurred claims are claims paid plus the change in outstanding claims including IBNR during the year.
What is a combined ratio in insurance?expand_more
The sum of the net commission ratio, the expense ratio and the net incurred claims ratio. Below 100% means an underwriting profit; above 100% means an underwriting loss.
What is the difference between loss ratio and claim settlement ratio?expand_more
Loss ratio measures the cost of claims against premium earned. Claim settlement ratio measures the share of claims, by number, that the insurer settled.
Can an insurer make a profit with a combined ratio above 100%?expand_more
Yes, if investment income on its reserves and funds exceeds the underwriting loss. IRDAI's definition of insurance profit is underwriting profit plus investment income on insurance funds.
Next steps
- Insurance Reservesarrow_forward
- Burning Costarrow_forward
- IC-01: Claim settlement ratioarrow_forward
- IC-01: Insurance accountsarrow_forward
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