Insurers keep score with three ratios:
Loss ratio = incurred losses (including loss adjustment expenses) ÷ earned premium.
Expense ratio = the share of premium spent on operating costs, such as commissions and overhead.
Combined ratio = loss ratio + expense ratio.
Use earned premium, not written premium, for the loss ratio, because earned premium matches the coverage period that produced the losses. Example: earned premium $12,000,000 and incurred losses $7,800,000 give a loss ratio of 65%.
A combined ratio above 100% means losses and expenses were more than premium: an underwriting loss. Example: combined ratio 103% and loss ratio 71% mean an expense ratio of 32% and an underwriting loss. The ratio leaves out investment income, so the insurer could still earn an overall profit.
Loss reserves are money set aside for claims the insurer will have to pay. Ins. Code §923.5 requires property and casualty insurers to maintain, at all times, reserves estimated to pay all losses and claims for which they may be liable, plus the expense of adjusting or settling them. Because the law requires them, they are also statutory reserves. Section 923.5 does not apply to life, title, disability, mortgage or mortgage guaranty insurance.