Combined ratio may seem like a standard calculation, but that's not always the case
The humble combined ratio might seem an unlikely source of contention. But in some areas – London in particular – insurers and equity analysts are wrangling over how this universal measure of underwriting profitability should be reported.
It may be assumed that the combined ratio is a standard calculation. After all, every non-life company reports one. But while there are some conventions regarding its use, there is also an element of flexibility – which some firms are taking advantage of.
Specifically, they exclude certain costs from the expense ratio element, which essentially makes the combined ratio lower by several percentage points and therefore underwriting appears more profitable.
These exclusions are fully disclosed in companies’ earnings, but the pared back ratio is the one used in their headline figures, and an alternative all-in ratio is not usually published. To an untrained eye, one combined ratio is the same as another and will be treated as such.
There are several stories about why insurers do this. One is simply keeping up with the Joneses. If one company strips out the costs, those that do not follow suit could risk posting worse ratios. Another is to improve the ratio in those times when underwriting profitability is borderline.
The real problem here is not a moral one about trying to hide the true picture. It only takes a few minutes and a calculator to set the record straight. It is a problem of consistency.
If companies are calculating combined ratios differently, it is adding to the already onerous task of analysing results. Comparing performance is tricky enough across markets, so the last thing we need is more inconsistencies within the markets themselves. GR
Ben Dyson, assistant editor, Global Reinsurance