Expense ratio

The expense ratio measures how much of each premium dollar an insurer spends running its business rather than paying claims. It includes agent and broker commissions, salaries, advertising, technology, premium taxes, licenses and fees, and other underwriting costs. Claim-handling costs are usually counted with losses in the loss ratio instead.

The basic formula is underwriting expenses divided by premium. Example: an insurer with $2 billion in premium and $500 million in underwriting expenses has an expense ratio of 25%. Add a loss ratio of 70% and the combined ratio is 95, an underwriting profit of 5 cents per premium dollar. Reports sometimes divide expenses by written premium and sometimes by earned premium, so check the definition when comparing figures.

Expense ratios differ by business model. Companies that pay agent commissions and companies that spend heavily on national advertising carry different cost structures, and insurers often point to efficiency gains, such as digital claims handling, as a way to hold rates down. For drivers, the expense ratio explains part of what a premium pays for beyond claims, and regulators review the expense assumptions in rate filings before approving or accepting new rates.