Swiss Re has introduced a new dimension to the conventional combined ratio, called the “economic combined ratio” [ECR].
According to Swiss Re, the ECR presents the following advantages when compared to the conventional combined ratio:
* The ECR isolates the underwriting results of a certain year (accident-year view), avoiding mingling with reserve additions or releases for prior years, which traditional business-year underwriting figures do.
* ECR adjusts for distortions due to extraordinary losses (catastrophes).
* ECR takes the time value of money into account by discounting future cash flows, particularly future claims payments.
“The economic combined ratio provides new insights into insurance cycles, as the U.S. property and casualty industry figures for 1994-2004 demonstrate,” according to a Swiss Re report.
Differences include, for example:
* The ECR shows economic underwriting profitability deteriorated from 1994 to 1997, although the reported headline business-year combined ratio improved.
* The ECR shows the cycle trough was reached in 2000, rather than in 2001.
* The accident years 1998-2001 were considerably worse according to the ECR than indicated by the conventional business-year combined ratio.
* Profitability in 2003-04 was comparable with 1994-95 despite a 5% lower combined ratio, because the current low interest rate environment reduces the impact of discounting for future claims payments.