An insurer’s income statement · RiskAtoms Academy

By the end you will be able to

1Explain premiums, claims, the combined ratio and investment income in an insurer's income statement.
2Calculate the loss ratio, the expense ratio and the combined ratio.
3Explain how an insurer with a combined ratio above 100% can still make a profit.
4Recognise the IFRS 17 headings: insurance revenue, insurance service result and net financial result.

Why it matters

An insurer can pay out more in claims and costs than it collects in premiums and still report a profit. One number, the combined ratio, tells you whether it is making money from insurance or from its investments.

Core explanation

Two engines: underwriting and investing

An insurer makes money in two ways. It can charge more in premiums than it pays in claims and costs. That is underwriting. And it can invest the premiums between the day they arrive and the day claims are paid. That is investing. The income statement shows both. Start with non-life insurance: motor, home, business.

Premiums. Gross written premiums are the premiums on all policies sold in the year: €9,000m for Example Insurance SE's non-life business. Some is ceded to reinsurers (€900m), leaving net written premiums of €8,100m. But a policy sold in December covers mostly next year. Only the part that matches cover already given counts as earned premium. After the change in unearned premiums, net earned premiums are €8,000m.

Claims. Claims incurred are claims paid plus the increase in reserves for claims not yet paid, including those not yet reported. Here: €5,200m.

Expenses. Commissions to brokers and agents (acquisition costs, €1,600m) and running costs (€800m).

What is left is the underwriting result: €8,000m − €5,200m − €2,400m = €400m.

The combined ratio

Divide each cost by net earned premiums:

Ratio	Calculation	Example Insurance SE
Loss ratio	€5,200m ÷ €8,000m	65.0%
Expense ratio	€2,400m ÷ €8,000m	30.0%
Combined ratio	Loss ratio + expense ratio	95.0%

Below 100%: the insurer keeps 5% of every euro of premium as underwriting profit. Above 100%: underwriting loses money.

Investment income. The insurer's investment income comes from the portfolio met in L1.8.04: €2,600m this year. Much of it belongs, in effect, to life policyholders: their savings and annuities grow with it. So the statement takes off the return credited to them (€1,900m), and the insurer keeps a net investment result of €700m.

Life business. A life insurer's profit does not come in a single year's claims, so there is no combined ratio. It is a margin earned over decades, on mortality, longevity, fees and investment spread. Here the life result is €500m.

Example Insurance SE, year	€m
Non-life underwriting result	€400m
Life result	€500m
Net investment result	€700m
Other expenses	−€200m
Profit before tax	€1,400m
Tax at 25%	−€350m
Profit for the year	€1,050m

What IFRS 17 changed. Since 2023, IFRS insurers present this statement differently. Premiums written no longer appear as the top line. Instead, “insurance revenue” reflects the cover provided in the period, the insurance lines add up to an “insurance service result”, and investment income is shown next to insurance finance expenses. Switch the labels below and click any line.

Example Insurance SE: income statement, €m

Simplified. Click a line for what it means. Real IFRS 17 statements also show reinsurance separately and split some expenses differently.

The formal version

The combined ratio uses nothing more than percentages (see the Math Atom). Start from its definition and split it in two:

\text{CR} = \frac{\text{Claims} + \text{Expenses}}{\text{NEP}}

\text{CR} = \underbrace{\frac{\text{Claims}}{\text{NEP}}}_{\text{loss ratio}} + \underbrace{\frac{\text{Expenses}}{\text{NEP}}}_{\text{expense ratio}}

Rearranged, it gives the underwriting result directly:

\text{Underwriting result} = \text{NEP} \times (1 - \text{CR})

NEP is net earned premiums. Check: €8,000m × (1 − 95%) = €400m. Definitions vary: some insurers divide expenses by written rather than earned premiums, or leave out some costs. The combined ratio is not set by IFRS, so always read the company's own definition.

Try it

Start at Example Insurance SE's non-life figures. Push claims up until the combined ratio crosses 100%. How much more can claims rise before investment income no longer covers the gap?

Try itCombined ratio calculator

Open the percentage calculator →

Net earned premiums€8,000m

Claims incurred€5,200m

Expenses€2,400m

Investment income on the float€300m

Combined ratio95.0%

0%100%150%

loss ratio 65.0% expense ratio 30.0%

Underwriting result

€400m

+ Investment income

€300m

= Non-life result before tax

€700m

Below 100%: the insurer makes money on underwriting alone, before any investment income.

Worked example

Above 100%, still profitable

Example General Insurance Ltd is a made-up Australian motor and home insurer. Last year it had net earned premiums of A$2,000m, claims of A$1,460m after a bad storm season, and expenses of A$600m. It earned A$150m on its investments.

Underwriting loss, overall profit

Step 1 of 6

1
Loss ratio
A$1,460m ÷ A$2,000m = 73%.

Claims that turn out bigger than reserved hit both statements at once: claims incurred go up in the income statement, and technical provisions go up on the balance sheet. Raise non-life claims in Example Insurance SE's balance sheet and watch equity and return on equity.

Interactive balance sheetExample Insurance SE

€ million, year end

Return on equity starts from this year's profit of €1,050m, less any reserve increase, ignoring tax relief.

Assets · €70,000m

Liabilities and equity · €70,000m

assets liabilities equityDashed outline: size before any shock.

Assets: what it owns

Investments€63,000m

Total assets€70,000m

Liabilities and equity: how it is funded

Liabilities
Technical provisions€54,000m
Equity

Total liabilities and equity€70,000m

Government bondsasset · 40.0% of total assets

Bonds issued by governments, held to match long-dated promises to policyholders.

Risk to watch: Interest rate risk, and the credit risk of the issuing governments.

Apply a shock

Non-life claims cost more0.0%

Non-life technical provisions rise because claims turn out bigger than expected.

Loss charged to equity

€0m

Equity

€7,000m → €7,000m

Share of equity lost

0.0%

Return on equity

15.0%

Profit after the shock ÷ equity. Ignores tax.

Equity ÷ assets

10.0%

How much of the balance sheet the owners fund.

Regulatory lens · looking ahead

IFRS 17 sets the presentation for IFRS insurers; US insurers report under US GAAP and statutory rules, where “premiums earned” is still the top line. Solvency II reporting in the EU uses its own templates for premiums, claims and expenses by line of business. Later levels go into insurance risk, reserving and IFRS 17 measurement, including the contractual service margin.

Sparks

SparkNot an accounting number

The combined ratio appears in almost every non-life insurer's results, yet no accounting standard defines it. It is an alternative performance measure, and companies choose what goes in. Two insurers both reporting 95% may not be measuring the same thing, so read the footnote.

SparkBorn in a coffee house

Lloyd's of London takes its name from Edward Lloyd's coffee house, where ship owners and merchants met in the late 1600s to share the risks of sea voyages. Underwriters wrote their names under the risk they agreed to cover, which is where “underwriting” comes from.

Key takeaways

Written premiums are policies sold; earned premiums match cover already given. Ratios use net earned premiums.
Claims incurred = claims paid + the change in claims reserves.
Combined ratio = loss ratio + expense ratio. Below 100% is an underwriting profit.
Investment income on the float can turn an underwriting loss into an overall profit, but only while markets cooperate.
IFRS 17 replaced premiums with insurance revenue and groups results into an insurance service result and a net financial result.

Reaction

Check what stuck

Question 1 · objective 2

A motor insurer has net earned premiums of €500m, claims incurred of €340m and expenses of €145m. What is its combined ratio, in %?

%

Question 2 · objective 1

On 1 October a customer buys a 12-month home policy for €1200. The insurer's year ends on 31 December. How much of the premium is earned in this year, in €?

€

Question 3 · objective 3

An insurer's combined ratio is 104%, and it earns investment income equal to 8% of its earned premiums. Is it profitable before tax (ignoring other costs)?

ANo: any combined ratio above 100% means a lossBYes: an underwriting loss of 4% of premiums is more than covered by 8% investment incomeCIt cannot be said without the loss ratioDOnly if its expense ratio is below 30%

Question 4 · objective 2

Example Insurance SE has net earned premiums of €8,000m and acquisition and administrative expenses of €2,400m. What is its expense ratio, in %?

%

Question 5 · objective 4

Under IFRS 17, which line sits at the top of an insurer's income statement?

AGross written premiumsBInsurance revenueCNet investment incomeDClaims paid

Glossary

Gross written premiums: Gross written premiums: the premiums on all policies sold in the period, before any reinsurance.
Ceded premiums: Premiums passed to reinsurers in exchange for their taking on part of the risk.
Earned premium: The part of a premium that relates to cover already provided. The rest is unearned and held as a liability.
Claims incurred: Claims paid in the period plus the change in reserves for claims still to be paid.
Loss ratio: Claims incurred as a percentage of net earned premiums.
Expense ratio: Acquisition and administrative expenses as a percentage of net earned premiums.
Combined ratio: Loss ratio plus expense ratio. Below 100% means an underwriting profit.
Underwriting result: Earned premiums minus claims and expenses: the profit or loss from the insurance itself.
Investment income: Interest, dividends, rents and gains from the insurer's investments.
Insurance finance expense: Under IFRS 17, the cost of the time value of money on insurance liabilities, set against investment income.

Deep Dives & Origins

Deep Dives

Saunders and Cornett, Financial Institutions Management: A Risk Management Approach (McGraw-Hill), the chapter on insurance companies. Intermediate.
IASB, IFRS 17 Effects Analysis (2017). Intermediate.

Origins

IASB, IFRS 17 Insurance Contracts (2017, amended 2020), the presentation requirements for the statement of financial performance.
Hull, Risk Management and Financial Institutions (Wiley), the chapter on insurance companies and pension plans.
Lloyd's of London, “Our history” (lloyds.com).

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