Consider the income statement of an insurance company for the year X, that we can refer to the last final balance , but it could be also (X+n), if it is related to a budget or to a growth plan, for which we have to fix the primary target and to point out the intermediate  instrumental targets.

In this paper the analysis on the final balance has a purely methodological function and it is useful to realize the fundamental meanings of the mathematical variables included in indices and ratios usually used, from which  we can infer opinions on the characteristic management of the company during last year, but more practical utility has the projection or the use of methodologies on management strategies related to future plans or business plan. The importance of this second utility use is particularly felt in these times of financial market jitters in particular, requiring defensive or aggressive strategies as :

  • the section in which the individual company is placed;
  • the current or expandable property strength;
  • the organizational capacity and the human capital resource;
  • the imagination, the cultural level and the management willpower;
  • the territorial location;
  • the reactive ability of competitors;
  • the restrictions of the rules imposed by the lawmaker and the authorities;

The business economics applied to the insurance companies has developed various analytic indices and the most popular is lately the combined ratio for its suitability to detect critical points and strategic chances.

We can note that this index  is pointed out by the companies in their periodic reports and in extraordinary occasions  to raise capital to convince potential underwriters about the perspective ability to ease returns, hoped to translate into dividends.

Therefore, we must start by saying , not existing actually uniformity in the components of the index and some interpretative resilience, we can note in practice, some diverging uses and, particularly, between the internal real ratio and the one  published outside.

Please note, first, that the equity of a company, a fundamental component of the solvency ratio, varies according to two components : a) the capital increase for contributions raised by shareholders and b) the capitalization or retention of operating profits.

For the mutual insurance company the letter b) is prevalent and marginally  the contribution by the  funding members (letter a).

There is a cascade connection between the components of the upper income account (roughly: “Typical insurance area” and “Finance”) and ” the economic result of period”. . This last, as it is a simple number, also if it is full meaning.

If we intend to examine the business strategies and tactics, it is necessary to analyze the two macrocomponents: typical insurance area and finance.


The most significant strategic variable is considered the combined ratio, which is the sum (combined) of LOSS RATIO RATIO + EXPENSE RATIO

The combined ratio is usually considered an indicator of insurance company profitability. It is expressed  in a % and if, its value exceeds 100%, it means  that the company is paying more than it is cashing, while if it less than 100%, it means that it is cashing more than it is paying.

The target is

and if, instead of an analysis of a result sheet for appropriate critical assessments on policies and actions that led to that result, there is a target of future policy (for example: a plan for expansion), the strategy to achieve it, may be the result of the tactics developable by examining components of the combined ratio.

To analyze the variables on which the policy can develop their actions in order to achieve the strategy, we should consider the extended formulation of the combined ratio

a)       If the target is to lower the combined ratio, we have to increase the numerator or to lower the denominator or, in an  expansive phase: to increase the net premiums at denominator more proportionally than the sum of the components of the numerator, obviously considering that the tactic is not free but at least it must deal with two realities: the internal organization, which has an itself area of flexibility, but within certain limits. With the rationalization  tactics (reorganization) it is certainly possible to reduce to some extent the acquisition costs (commissions, etc.), but unless the facility and the production resources of the insurance activities are not compromised; the same cannot be applied to the administration expenses. Not much  malleable is the third component of the numerator: the damages. In fact, it is is external and it depends  on the casuality of the insured individuals’ behavior. It can be partially  of internal source, due to the precautionary screening of portfolio. For example: in car civil liability, the expulsion of less virtuous insured can breed a contraction in the costs of the damages, but it is a medium-long run policy, since it depends on the regulatory and contractual rigidities;

b)                 the market and the competitors’ behavior, that can frustrate the tactics of attack and expansion of an individual company.

It should seem easier to operate on the denominator: the premia, where the increase is not an easy to implement tactics, since the reactions of the market (insured and insurable individuals) and the competing companies could give a negative result.


As the definition states, the combined ratio is an index that gives the synthesis of a profitability assessment of the insurance area and if it is real, and it surely is, that the economic result is the final target for the company (strategy),


if we cannot lower the combined ratio to less than 100 with combined polities (tactic), we have to conclude (as a result), that the negative result from insurance area can be corrected, to save the final target of net profitability, only the by financial area.

If the contribution by the finance area is larger than the lack of profitability in the insurance area, the final economic result can still be positive. But, in an era of high volatility and uncertainty  in the financial markets, finance is not able to generate positive or satisfactory values, that are suitable to fend off the combined ratio above 100, then the period is bound to close with a loss, with effects on the net business wealth and the solvency ratio.

Moreover there is a further problem: solvency is an index (coefficient) or ratio between capital and weighted assets. Now, we have to consider that if the finance area does not give positive results aside from cases of management ineptitude on the financial assets, but by adverse trend of the markets, it means that this can have negative effects on portfolio values; This implies that even savers may suffer losses on their investments and tend, at least in the short run, not to use the insurance, especially life insurance. These joint effects affect together and adversely on the solvency ratio.


Besides the easy to do external manipulation of the index, than can be deceptive, especially in the capital markets when the company asks for a new capital subscriptions, we should observe that the use of the single index can pose some risks also when it is restricted  to an internal use for the management. An index is useful but non in an absolute way as we usually consider it, since it should be read together with other business ratios. For example, if we do not correlate it with the frequency of damages can be a limitation. It suffices to consider the linkage with the combined ratio.

Let us to take again the previous formula

The cost for damages at the numerator of combined ratio has an, at least indirect, relationship with the numerator of the frequency ratio; the same holds for the value of net premias of the denominator of the combined ratio and the total number policies at the denominator of frequency ratio.

Moreover we can find a linkage between the two prior ratios and the traditional index, generally expressed  a  percentage, Damages/Premiums or simply D/P.

Apart from simple mathematical analyses, we should consider that if the frequency index worsens, i.e. increases, it is likely that either Ratio D/P or the combined ratio follow an analogue trend.

The mechanisms of the indexes have to be integrated by the analytic sensitivity of the interpreter.


It can be relatively easy to develop a strategy in these times for the insurance companies: it is just a question to set a target (final profitability); for this generals  that play at the war on a model  can indulge on that too. The division commanders’ task is less easy since their tactics are not enough against three situations:

  • the contrapositions costs-premia in the typical insurance area, that operate against the reduction of the combined ratio;
  • the difficulties to realize suitable results in the financial area;
  • the tax and administrative increasing costs charged by government bodies and authorities, that seem aimed at destroying smaller companies to give way to greater groups, which, strong by large numbers, can carry the consequences of the bureaucratic useless vexations on very large bases.

These observations confirm the previous assertion that strategy and tactics must operate with coherence to realize the prefixed mark to the range (maturity) and with the available weapon (resources).