difference between the measuring and non measuring insurance
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Sound technical underwriting is a prerequisite for overall profitability in a low-yield financial environment. The combined ratio is the standard performance metric for non-life underwriting profitability. However, the focus of the conventional combined ratio or other accounting-based measures lies on measuring the impact of claims events and the flow of information as timely as possible but entails significant limitations for judging the underlying underwriting profitability. This paper proposes the economic combined ratio as an alternative for measuring underwriting profitability, addressing the question “How profitable is insurance business written in each year?” It has the following characteristics: (1) based on accident-year data, not business-year data, so adjustments for reserve developments are included; (2) alleviates distortions resulting from extraordinary catastrophic loss events; (3) takes into account the time value of money by discounting future claims payments. Using the economic combined ratio provides new insights for the understanding of the insurance cycle of the US P&C industry.