Insurance Expense Ratio and Combined Ratio Benchmarks

How much should an insurer spend to acquire and administer its business?

The U.S. property and casualty industry reported an expense ratio of 25.8% and a combined ratio of 92.9% for 2025, according to the NAIC’s full-year industry analysis. Those figures give insurers a useful starting point for benchmarking in 2026.

They do not give every insurer the same target.

A personal auto carrier, a specialist commercial underwriter and a newly launched insurer have different acquisition costs, service demands and premium volumes. Their ratios can also use different accounting definitions. Meaningful insurance expense ratio benchmarks need to account for those differences before they become operating targets.

Insurance expense ratio benchmarks: the latest full-year picture

Recent U.S. P&C results show why the expense ratio and combined ratio should be read together.

Source: NAIC, U.S. P&C industry results. These are industry aggregates, rather than the median insurer’s results.

The insurance industry combined ratio improved by 4.0 percentage points in 2025, even though the expense ratio increased by 0.5 points. Better overall underwriting results therefore did not require a lower expense ratio that year.

That distinction matters in management discussions. A business can improve its underwriting performance while spending more on distribution or administration. It can also cut operating costs while deteriorating loss experience overwhelms those savings.

What is the expense ratio in insurance?

The underwriting expense ratio measures the cost of acquiring and administering insurance business relative to premium.

For the U.S. statutory framework discussed here, the expense pool includes commissions and brokerage, premium-related taxes and fees, other acquisition costs, and general expenses. Claims adjustment expenses belong in the loss adjustment expense component of underwriting results, rather than being added again to this expense pool. NCCI’s 2026 State of the Line Guide sets out these categories and the associated formulas.

This underwriting expense ratio definition is especially useful when evaluating technology projects. Automating policy issuance may affect underwriting expenses. Improving claims handling may affect LAE. Both can improve results, but they do not necessarily improve the same ratio.

An insurance company expense ratio is also different from an agency’s operating expense ratio. The agency earns commissions and fees; the carrier earns premium and bears insured losses. Comparing their percentages without checking the denominator tells you very little.

The insurance expense ratio formula - and the denominator problem

For a conventional U.S. statutory P&C calculation:

Underwriting expense ratio = underwriting expenses incurred ÷ net written premium × 100

The statutory combined ratio convention uses earned premium for its loss and LAE components, while the expense component uses written premium. NCCI’s formula appendix documents that distinction.

Company financial reporting may instead express underwriting expenses as a percentage of net earned premium. Progressive, for example, uses net earned premium for the segment ratios discussed below.

The difference can be material.

Consider this simplified illustration, holding the expense amount constant solely to demonstrate the denominator effect:

Nothing became less efficient between the last two rows. The denominator changed.

A full reconciliation between accounting bases may also require adjustments to expense recognition. You cannot necessarily convert a reported statutory ratio into a GAAP ratio by changing the premium figure alone.

Before comparing two insurers, check the accounting basis, premium denominator, treatment of reinsurance and definition of included costs.

Commission expense ratio: a worked formula

For a commission component calculated consistently with a written-premium expense ratio:

Commission expense ratio = commissions and brokerage expenses incurred ÷ corresponding written premium × 100

Suppose the illustrative insurer’s $25 million expense pool includes $12 million of commissions and brokerage. Against $100 million of net written premium, its commission expense ratio is 12%.

That 12% is already part of the total 25% expense ratio. Adding it again would double-count acquisition costs.

Keep the expense and premium bases consistent, including any reinsurance adjustments. A contractual commission percentage on a particular product is not automatically the same as the insurer’s portfolio commission expense ratio.

How does the combined ratio work?

Under the statutory convention used by NCCI:

Combined ratio = loss ratio + LAE ratio + underwriting expense ratio + policyholder dividend ratio. Source: NCCI

A hypothetical insurer with a 70% loss and LAE ratio, a 25% expense ratio and a 1% policyholder dividend ratio has a 96% combined ratio.

Broadly, below 100% indicates an underwriting profit; above 100% indicates an underwriting loss. But a 96% combined ratio does not establish a 4% net profit margin. Investment results, taxes and other items affect the final result, and statutory components use different premium denominators.

There is another question worth asking: what drove the reported underwriting result?

Current-year claims, catastrophe experience and changes to prior-year reserves can move the calendar-year combined ratio in different directions. When an insurer also publishes an underlying or accident-year ratio, read its definition before using it as a comparison. Adjustments are not identical across companies.

Expense ratios by channel and business mix: a carrier example

Source: Progressive 2025 Financial Review, segment underwriting results. Ratios use net earned premium, with fees and other revenues offsetting expenses according to their underlying activity. Reported Florida policyholder credits added 1.9 points to the Agency expense ratio and 1.7 points to Direct.

The direct business had the higher expense ratio in this example. Progressive also reported $5.1 billion in company-wide advertising spending in 2025. That advertising figure is not a Direct-only allocation. Source: Progressive

The practical implication is straightforward: removing an agent commission does not remove acquisition costs. Marketing, contact centres, quote servicing and technology still need funding.

Property had the highest expense ratio and lowest combined ratio here. Evaluate costs alongside loss performance. These are company examples, rather than industry averages.

Specialty insurance has a different cost structure

At Lloyd’s, the 2025 expense ratio was 35.6%, up from 34.4% in 2024, while the combined ratio was 87.6%. Lloyd’s attributed the expense increase to profit-related commissions, acquisition mix and foreign exchange effects. Source: Lloyd’s full-year results

Lloyd’s defines its expense ratio as net operating expenses divided by earned premiums net of reinsurance. Its 2025 annual report provides that definition.

This is a market-level measure covering specialist insurance and reinsurance business. It should not be treated as directly interchangeable with the U.S. aggregate statutory expense ratio.

It does show why a blanket rule such as “expenses above 30% are too high” is unhelpful. Distribution remuneration and specialist underwriting costs have to be assessed against the business they support and the resulting underwriting performance.

Setting a target for your own book

For a broad U.S. reference, the latest full-year aggregate in the property and casualty industry statistics is approximately 26%. A useful target for an individual insurer requires a more specific comparison.

Start with five questions:

1. Is the business mix comparable? Personal auto, commercial property and specialist liability have different operating demands.
2. Is the distribution model comparable? Consider commissions, advertising, service responsibilities and partner fees together.
3. Is the growth stage comparable? Launch costs and acquisition spending can distort comparisons with an established renewal book.
4. Is premium changing because of price or volume? Premium increases can improve the ratio without reducing the work required per policy.
5. Are the reporting definitions consistent? Match gross or net figures, written or earned premium, and reported or adjusted results.

Use insurance expense ratio benchmarks to identify where to investigate. Set the operating target after understanding the gap.

How to improve the insurance expense ratio without weakening the business

The most useful improvement programme connects financial reporting to the work behind it.

Measure the cost of completing a transaction

Track cost per issued policy, renewal, endorsement and servicing request alongside the expense ratio. If premium rises while transaction costs stay flat, the ratio may improve without an operational gain.

Equally, a service team may become more productive during a period of falling average premiums, with little visible improvement in the headline ratio.

Find repeated work

Look for submissions entered into multiple systems, missing documents that trigger repeated follow-ups, manual commission reconciliation and renewal cases passed between teams without a clear owner.

These are concrete opportunities to investigate. Record the original handling time and error rate, make the change, then measure the outcome.

Evaluate acquisition spending over the customer relationship

New business can be expensive to win. Compare acquisition cost with expected contribution after losses, servicing and renewal behaviour. A cheap acquisition channel with poor persistency may create less value than a more expensive channel that brings suitable, durable business.

Keep quality measures beside the savings

Monitor complaints, processing errors, renewal outcomes and underwriting exceptions. A cost reduction that shifts work onto agents or creates avoidable customer contacts can reappear elsewhere in the business.

For illustration, a one-percentage-point expense ratio reduction on an unchanged $100 million premium denominator represents $1 million of lower expenses. Whether the business is better off depends on what changed to achieve it.

Build reporting around the decisions you need to make

Expense management becomes more useful when finance, underwriting and operations can trace a ratio back to products, channels and workflows.

Openkoda provides a platform for configurable insurance applications, including policy administration and reporting. For insurers reviewing their operating costs, a practical starting point is to connect transaction data, expense allocations and service outcomes in a reporting process teams can use consistently.