What does the combined operating ratio encompass?

The combined operating ratio is a key measure used in the insurance industry to assess the profitability and efficiency of an insurance company, particularly in relation to its underwriting operations. This ratio is calculated by adding the claims cost, commission costs, and operational expenses together. The sum gives insurers insights into how well they are managing their costs relative to the income generated from premiums.

When the combined operating ratio is below 100%, it indicates that the insurer is making an underwriting profit, as they are spending less in claims and expenses than they are earning in premium income. Conversely, a ratio above 100% signifies an underwriting loss. Therefore, selecting the option that accurately reflects this relationship—claims cost plus commission plus expenses—correctly identifies how the combined operating ratio is determined and what it signifies about the insurance company's financial health.

The other options do not encapsulate the full picture of the combined operational ratio. For instance, focusing solely on total claims cost does not account for expenses and commissions that also impact profitability. Premium income plus investment income relates to total revenues but lacks the necessary granular detail on expenditures that influence operational efficiency. Lastly, total income minus operating expenses does not encompass claims or commissions, leaving out critical components of the insurance operation’s costs.