Properly assessing and managing your organization’s financial indicators can nurture sustainable business growth. If you oversee health insurance plans for members, the combined ratio (CR) is one of the most important metrics to scrutinize.
In this article, you will learn the ins and outs of combined ratio reporting and why it is essential for your risk adjustment strategy. Our team at ChartRequest will also discuss how fast access to medical records can improve your organization’s workflow and accuracy.
What Is the Combined Ratio?
The combined ratio is a financial metric that measures whether your insurance company earns more revenue from its collected premiums than it pays out in claims.
It will provide accurate insights into your business performance, including:
- Risk management
- Operational efficiency
- Sustainability of your current premium model
Finding the combined ratio requires you to distinguish the fundamental difference between loss ratios and expense ratios.
Loss Ratio: The loss ratio represents the ratio of claims paid by your company to the premiums earned in any given period. Most insurance companies measure their loss ratio annually.
Expense Ratio: The expense ratio is your insurance company’s premium percentage on total business expenses. You can calculate yours by dividing the costs of acquiring, servicing, and underwriting health premiums by the net earned.
How To Calculate Combined Ratio
Here is an easy way to calculate your combined ratio:
1. Find the Loss Ratio: Money Lost By Claims + Adjustment Costs / Earned Premium
2. Find the Expense Ratio: Underwriting Costs + Commissions / Total Premium Written
3. Combined Ratio: Claim-Related Loss + Claim-Related Expense / Total Earned Premium = Combined Ratio
Why Finding Your Combined Ratio Is Important
At its core, your combined ratio tells the story of loss and gain for your insurance company — showcasing the strength and sophistication of your insurance underwriting policies.
A CR below 100% indicates that your insurance company profits from the underwriting process. It also means that the premiums collected will cover claims and expenses. On the other hand, a CR above 100% suggests an underwriting loss where the costs (claims and expenses) exceed the premiums received.
Uncover Operational Efficiency
The combined ratio demonstrates how well your insurance company competes among others. For example, the CR of the property and casualty (P&C) insurance industry reported an underwriting loss of $39 million in 2021. This number indicates sector-wide changes in operational policies and efficiency.
Knowing your CR can help you stay current with industry trends and establish a leaner and more resilient organizational structure.
Establish Informed Pricing and Policies
The combined ratio influences how your company establishes health plan fees. If your ratio remains consistently high, you might experience underpricing risks or high claims costs. Additionally, it might prompt you to increase premiums to cover losses and maintain profitability.
A consistently low CR could enable premium reductions, making your policies more attractive and competitive in the insurance market.
Practice Strategic Decision-Making
Combined ratio is crucial when it comes to your decision-making as a company. It may encourage you to adjust the following aspects of your operations:
- Risk selection
- Policy terms
- Reinsurance arrangements
- Investment strategies
Strategic decision-making has a significant impact on the long-term success and sustainability of your insurance company.
Improve Investor Insights
A favorable combined ratio is attractive to industry investors. Excellent CR scores demonstrate that your company is financially stable and reliable when managing risks and expenses.
Challenges When Calculating Combined Ratios
Calculating the combined ratio of your insurance company’s operations yields some challenges that can affect accuracy.
Here are some of the hurdles you may need to jump when computing an accurate combined ratio:
Data Collection and Management Issues
Accurate CR calculation relies on the existence of comprehensive and complete data. Precise calculations of earned premiums, incurred losses, loss adjustment expenses (LAE), and underwriting expenses are all necessary during combined ratio evaluation. Mistakes in the data can misrepresent the profitability and efficiency of your insurance company.
These issues often manifest in the following:
- Missing Data: Missing information can lead to inaccurate loss calculations and unreported expenses.
- Scattered Data: Information spread across different systems is challenging to consolidate during CR calculations.
- Outdated Systems: Older office technology and record systems may not efficiently track or report data, affecting the accuracy of your CR.
Fortunately, ChartRequest’s RecordGateway software for insurance providers can ensure that you have fast access to bulk records when needed. We implement automated technology to authorize and release health information to simplify your risk adjustment strategy.
Reserve Estimate Fluctuations
Reserve estimates can affect your CR calculations. This critical financial practice ensures that you can meet future policyholder obligations.
Reserve estimation requires your company to hold a set amount of money to pay for unsettled claims. These reserves also apply to unreported, incurred claims (IBNR).
It can be challenging to predict the future, even as an insurer. Despite access to critical data, emergencies like natural disasters and disease can create a sudden influx of diverse claims. Hence, it’s essential to give your insurance policies breathing room and expect every reporting year to be different than the last.
Allocating Operational Expenses
Operational costs can vary widely across different market conditions. These fluctuations introduce confusion during CR calculation. Lack of standards in determining what constitutes underwriting expenses can lead to inconsistencies in allocation and reporting.
Moreover, an absence of financial uniformity can skew the combined ratio and make it harder to benchmark against competitors during specific periods accurately.
Impact of Reinsurance
Reinsurance is like a safety net for organizations like yours.
Sharing your risk with another company can lower the chances of paying out a large sum of money during significant claims. Reinsurance enables you to set aside less for potential claims, which can optimize your combined ratio.
Fluctuation in Premium Volumes
Significant changes in premium volumes from growth, market expansion, or policy cancellations can affect your organization’s combined ratio.
For example, higher premiums may seem beneficial because they mean more money for your company. But, if you do not manage the extra money wisely or face a higher volume of claims, the CR might still indicate financial troubles.
Also, consider that your members may cancel their insurance plans or fail to renew them. You must reallocate funds in different sectors when cancellations occur to maintain financial balance.
3 Best Practices To Improve Your Combined Ratio
Refining your combined ratio strategy will help you stay competitive in an ever-expansive insurance market. Following the industry’s best practices will boost your ability to achieve high profitability and efficiency.
Here are the top 3 best practices to improve your combined ratio:
1. Enhance Your Underwriting Standards
Implementing rigorous underwriting criteria allows you to evaluate risks appropriately. To guarantee quality results, you will need accurate and quality data — like complete medical records — at your fingertips.
Adopting data analytics tools can help you better assess risk. These resources help you confidently gauge each applicant’s risks and minimize your loss ratio.
2. Streamline Claims Management
Optimizing claims management means deploying efficient methods to handle claims from start to finish. Streamlining this particular process can help reduce claim-handling expenses and discourage fraudulent claims.
Proactive claims management identifies and mitigates potentially significant claims, preventing escalation.
You can significantly cut costs and increase customer satisfaction by improving this area.
3. Focusing on Customer Segmentation and Product Diversification
Focusing on customer segmentation is a strategic approach that can greatly improve your market position. On the other hand, product diversification enhances profitability and resilience against various risks.
- Improved Targeting and Personalization: Relevant marketing to specific groups increases engagement.
- Enhanced Customer Satisfaction: Meeting each segment’s unique needs and preferences boosts loyalty toward your insurance company.
- Efficient Resource Allocation: Focusing on the most profitable segments maximizes return on investment.
- Increased Market Penetration: Segmentation uncovers underserved or niche markets for growth.
- Higher Competitive Advantage: Understanding customer segments allows your team to meet specific policyholder needs, distinguishing your brand from competitors.
- Optimized Pricing Strategies: Segmenting enables precise pricing to match different groups’ willingness to pay, boosting profitability.
ChartRequest Will Simplify Your Access To Critical Data
When evaluating your company’s combined ratio, it’s easy to feel overwhelmed. Fortunately, ChartRequest’s RecordGateway platform will provide ease of mind when requesting bulk records for risk adjustments.
Schedule a comprehensive consultation with our team to learn more about how we can help you assess and manage risk during your combined ratio assessment.
