Combined Ratio Forecast Revised

A.M. Best Company has announced that it was revising combined ratio projections for the property/casualty insurance market for 2008.

Combined ratio is a simple measure of insurer profitability. Losses and expenses are on top as the numerator with earned premium underneath as the denominator. The resulting calculation results in a ratio. A ratio greater than 100% means the insurer is paying out more in losses, expenses, and claims than it is earning in premiums. A ratio less than 100% indicates greater premiums than losses, expenses, and claims. Best calculates a similar number for sectors of the insurance industry.

For the business owner this is important because an insurer facing higher combined ratio numbers may raise premiums to lower the ratio. There are a number of factors in addition to combined ratio projections that affect premiums, but these projections can serve as a rough guide. Also, premium competition among insurers, resulting in lower numbers, while beneficial to the business owner initially, can drive insurers out of markets reducing that competition over the long term. The result: higher premiums for harder to find insurance.

In January, 2008, Best reported a 98.6 combined ratio overall in the property/casualty industry. The revised ratio is 103.2. The news release attributes two points of the change to "losses linked to mortgage and financial guaranty insurers" as well as catastrophe and storms. When looking at "commercial lines" as a segment the projection is a combined ratio 104.0 up from 97.5 the "increase primarily reflects unprecedented underwriting losses reported by mortgage and financial guaranty insurers."

Insurers will make market moves, raise premiums, and control claims. In such a market, a business owner's best strategy is to choose and maintain a working relationship with a good insurance professional.