Question

4.3. Giyen below is the data on combined ratio of Sunlight Insurance Company (SIC): 2014 2015 2016 2017T 2018 Combined ratio 197.50 % | 102.20 % 105.30 % | 96.50% 192.50% What are the components of this ratio and what does a high or low combined ratio indicate? Compare and contrast the results reported for each of the years. What other information might an analyst want to review before concluding this information?

Answer 1

What is combined ratio?

Combined ratio is used to determine the financial health and stability of an insurance company. It helps in determining the profitability of the insurance company, i.e. whether the insurance company is earning more revenues in form of premiums received or paying more claims to its investors.

When combined ratio is below 100%, it represents good profit, while if the ratio is more than 100%, it represents, company is making loosing money in giving away with claims then earning revenue in form of premiums.

The various components of this ratio are:

1. Losses incurred by the company
2. Premiums earned by the company;
3. Expenses incurred by the comapny which includes underwriting expenses.

The above data shows the combined ratio of an insurance company over the years.

In 2014, the combined ratio is 97.50% representing more premiums earned by the company during the period then proecessing claims by the investors.

In 2015 & 2016, the combined ratio is more than 100% representing, more losses and expenses incurred by the company than earning in terms of premiums.

In 2017 & 2018, again the combined ratio is leass than 100% represents more profit to the company then losses.

However, combined ratio above 100% does not necessarily means that company is incurring losses, as there are other factors also, which determine the profitability of the financial health of the company.

There may be other non core business also which a comapny can undertake along with charging premiums from the customers, there can be income from investments in stocks , bonds, and other non core areas of business of the company. Hence, since the above information is not sufficient to comment on the financial viablility of the company , we can assume the above results are only basis the insurance business of collecting premiums and settling claims.