Expense Ratio

What is the Expense Ratio?

The expense ratio measures the operating cost efficiency of an insurance company, expressed as a percentage of premium. It is calculated as: Expense Ratio = Operating Expenses / Net Premiums Written × 100%. A 30% expense ratio means that 30 pence of every pound of premium written is consumed by operating costs — the distribution, administration, technology, and overhead costs of running the insurance business — before a single pound is paid in claims. Together with the loss ratio, the expense ratio forms the combined ratio, the primary measure of underwriting profitability.

The expense ratio is distinct from the loss ratio in that it captures costs the insurer controls directly through its operating decisions, rather than the claims costs that are ultimately driven by external events and the risks underwritten. Reducing the expense ratio is therefore squarely within management control: it requires operational efficiency, technology investment, distribution cost management, and scale. An insurer with a high expense ratio relative to its peers is either operationally inefficient, at a disadvantageous scale, or carrying a cost structure that its premium income cannot support sustainably.

Components of the Expense Ratio

The expense ratio encompasses several categories of operating cost. Policy acquisition costs are typically the largest component: broker commissions, agent fees, binding authority ceding commissions, and other distribution costs. These are largely variable (proportional to premium volume) and reflect the cost of accessing the insured population through intermediaries. Administrative expenses — policy processing, claims administration, IT systems, finance, actuarial, legal, and regulatory compliance functions — are partly variable and partly fixed overhead that scales less than proportionally with premium volume.

Management expenses including executive salaries, governance costs, risk management, and corporate functions are substantially fixed. Reinsurance costs — the additional premium paid for reinsurance above the ceded premium received — may be included in expense calculations depending on the reporting convention used. In the UK, the FCA requires expense breakdowns in regulatory returns that distinguish acquisition costs from administrative expenses, enabling supervisors to monitor cost structure trends across the market.

Expense Ratio Benchmarks by Business Model

Expense ratios vary substantially by business model and distribution channel. Direct writers (selling to consumers without intermediaries) typically achieve lower acquisition cost ratios than broker-distributed businesses, but must invest more in brand, marketing, and direct sales infrastructure. Lloyd's syndicates writing complex specialty business typically have higher expense ratios than standard lines personal lines writers, reflecting the additional underwriting expertise, broker relationships, and complexity management required. Insurtechs and digital MGAs often launch with high expense ratios reflecting technology investment and customer acquisition costs, with the expectation of achieving scale economies as their book grows.

The MGA model presents a particular expense ratio dynamic: the MGA's own operating costs must be funded from the ceding commission it receives from the capacity provider, creating a margin between the ceding commission rate and the MGA's actual expense ratio that represents its profit. An MGA receiving a 32% ceding commission on a book with a 28% expense ratio generates a 4-point margin — but only if the loss ratio on the ceded book is within the bounds that the capacity provider priced into the ceding commission level.

Technology and the Expense Ratio

Technology investment has a complex relationship with the expense ratio. Initial technology deployment increases expenses — system costs, implementation, integration, and training — before efficiency benefits materialise. Mature technology implementations, by contrast, can fundamentally reduce the expense ratio by automating manual processes, enabling smaller teams to handle higher volumes, and reducing error rates that generate costly rework. Straight-through processing, digital FNOL, automated document processing, and AI-assisted underwriting all hold the potential to reduce the expense ratio sustainably — but realising these savings requires sustained investment and organisational change, not merely technology adoption.