Table of Contents

Understanding the Insurance Expense Ratio: Methods and Importance

By

Andrew Sebastian

Updated October 26, 2025

Reviewed by

Chip Stapleton

Fact checked by

Jared Ecker

In the insurance industry, the expense ratio shows how efficiently a company manages its operating costs compared to the revenue earned from premiums. It is often used together with the loss ratio to calculate the combined ratio, a key measure of an insurer’s overall profitability. You can calculate the expense ratio using GAAP or statutory accounting methods. By tracking this ratio over time, you can compare insurers and understand their financial performance.

Key Takeaways

The expense ratio measures an insurance company's operating efficiency by comparing expenses to net premiums earned.
There are two methods to calculate the expense ratio: statutory accounting and GAAP accounting.
The expense ratio is combined with the loss ratio to form the combined ratio, a key profit metric for insurers.
Health insurers must adhere to the 80/20 Rule, returning a significant portion of premiums to policyholders.
An expense ratio below 100% suggests efficiency but doesn't guarantee overall profitability.

Comparing Statutory and GAAP Accounting for Expense Ratios

There are two ways to calculate expense ratios. Insurance companies typically use statutory accounting instead of generally accepted accounting principles (GAAP) accounting to calculate their expense ratios, as statutory accounting yields more conservative ratios.

Although the expenses are the same in both ratios, statutory accounting uses the net premiums written during the period in the denominator to get the expense ratio.

GAAP accounting uses the net premiums earned during the period. Net premiums written represent the new business brought in by the company, while net premiums earned may include both new business and recurring business from existing policies.

The Impact of the Affordable Care Act on Health Insurance Expense Ratios

Since the Affordable Care Act (ACA) was passed in 2010, the so-called 80/20 Rule was enacted, which applies to health insurers. Known as the medical loss ratio (MLR), the rule states that health insurance carriers must return 80% (or up to 85%, depending on the size of the plan) of health insurance premium income to pay for healthcare services to the policyholders.

Fast Fact

Individual states can adjust the 80% level if they prove that level might destabilize the health insurance market and result in fewer choices for consumers in that state.

Understanding Expense Ratios in Overall Insurance Profitability

The expense ratio can hence be used to compare companies and analyze a company's performance over time. An expense ratio under 100% signifies that the insurance company is either earning or writing more premiums than it is paying out in expenses to generate or support these premiums. Although its expense ratio can be stellar, the overall profitability of an insurance company is affected by its loss ratio, investment income, and other gains and losses.

Thus, the expense ratio is not a measure of ending profitability. Instead, it is a precursor to finding an insurance company's overall profitability.

What Is the Expense Ratio and Loss Ratio in Insurance?

The loss ratio is the total loss amount from total collected insurance premiums. The expense ratio is the percentage of premiums a company uses to pay expenses.

What Is the General Expense Ratio?

The general expense ratio indicates the per-unit cost of managing funds. It is calculated by dividing total expenses by total assets under management.

How Is Expense Ratio Calculated?

The expense ratio is calculated by dividing a fund's operating expenses by the average dollar value of assets under management.

The Bottom Line

The insurance expense ratio measures an insurer’s operational efficiency by comparing the costs of acquiring, underwriting, and servicing premiums to the net premiums earned. While it provides insight into a company's ability to manage its expenses, it is typically analyzed with the loss ratio to get a complete picture of overall profitability. The expense ratio serves as an important early indicator rather than a definitive measure of financial success.

Article Sources

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Centers for Medicare & Medicaid Services. "The 80/20 Rule Increases Value For Consumers For Fifth Year In A Row," Page 1.
Centers for Medicare & Medicaid Services. "State Requests for MLR Adjustment."

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