Insurers keep score with a few simple ratios:
Loss ratio = incurred losses ÷ earned premium.
Expense ratio = underwriting expenses ÷ premium.
Combined ratio = loss ratio + expense ratio. Below 100% means an underwriting profit; above 100% means an underwriting loss.
Example: $10,000,000 of premium, $7,000,000 of incurred losses and $2,500,000 of expenses give a 70% loss ratio and a 25% expense ratio. The combined ratio is 95%, an underwriting profit.
Three ways to arrive at a rate:
Manual rating: the published class rate from the manual, used as it stands.
Merit rating: the manual rate moved up or down for the individual insured's own loss record or features.
Judgment rating: the underwriter's experience sets the rate, usually because the risk is unusual and the statistics are thin.
Reserves: a loss reserve is the insurer's estimate of what it will still pay on claims. Statutory reserves are reserves the law requires, computed under the regulator's rules. California Section 923.5 requires the insurers it covers to maintain reserves at all times for losses, claims and adjustment expense, computed under the commissioner's regulations.