Lesson A3.2 · 2 of 5 · Special sectors
How to analyse an insurer: combined ratio, IFRS 17 and Solvency II
An insurer collects premiums first and pays claims later. It makes money in two ways: from underwriting, when claims and expenses come in below premiums (a combined ratio under 100%), and from investing the money it holds until claims are paid. The solvency ratio shows whether it has enough capital for a very bad year.
Terms in this lesson
- Net income
- What is left for shareholders after all costs, interest and tax.
- ROE
- How much profit the company makes from shareholders' money.
- Book value
- What would be left for shareholders after paying all debts, according to the balance sheet.
Premiums, claims and an insurer’s combined ratio
Definition
How is the combined ratio worked out?
The loss ratio plus the expense ratio.
Loss ratio = claims (paid and expected) ÷ premiums earned in the period. Expense ratio = the cost of selling and running the business ÷ the same premiums. Add them together and you have the combined ratio. Below 100% means an underwriting profit, a profit from the insurance business itself. Allianz, property and casualty, 2025: loss ratio 68.3%, expense ratio 23.9%, combined ratio 92.2%, against 93.4% in 2024.
Allianz, property and casualty, 2025: combined ratio 92.2%.
| Allianz | 2024 | 2025 |
|---|---|---|
| Loss ratio, property and casualty | 69.3% | 68.3% |
| Expense ratio | 24.2% | 23.9% |
| Combined ratio | 93.4% | 92.2% |
| Solvency II ratio | 209% | 218% |
| CSM, life and health | €55.6bn | €55.7bn |
Allianz, results for 2025, published on 26 February 2026.
Watch whether a ratio is quoted before or after reinsurance. Reinsurance means the insurer passes part of its risk to another insurer, along with part of the premium; the net ratio shows what stays with the company.
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Create a free accountInvestment income, reserves and float
Months or years pass between collecting a premium and paying a claim. In the meantime the insurer carries reserves on its balance sheet: liabilities for the claims it will pay. The money behind them is invested, mostly in bonds. If reserves are set too low, today’s profit is flattered and the gap shows up later, when the claims are paid.
Real case
Berkshire Hathaway and float
“When writing P/C insurance, we receive payment upfront and much later learn what our product has cost us…”
Warren Buffett, in his letter to shareholders for 2024, dated 22 February 2025; that moment of truth, he adds, can come 30 or more years later. The money Berkshire holds in the meantime is called float. Over the past two decades, he wrote, float grew from $46bn to $171bn, while underwriting produced $32bn of after-tax profit, about 3.3 cents for every dollar of sales. When underwriting is profitable, float is a loan that costs nothing and pays you to hold it.
Berkshire Hathaway, letter to shareholders for 2024 (22 February 2025).
IFRS 17: what changed in insurers’ accounts from 2023
IFRS 17 applies to reporting periods beginning on or after 1 January 2023 and replaces IFRS 4, an interim standard that let insurers use a wide range of accounting practices. For an analyst, the upshot is that figures from before and after 2023 cannot be compared directly.
Future cash flows from contracts are estimated on current assumptions, not the old ones from when the policy was written.
The profit not yet earned on a group of contracts; it is released gradually, over the period the insurer provides cover.
Shown separately, and excluding the investment component: money the customer gets back in any case.
In life insurance the CSM works like a store of future profits. Allianz reported a CSM of €55.7bn at the end of 2025, against €55.6bn a year earlier. A growing CSM usually shows the insurer adding profitable new business faster than it releases profit from older contracts, although it also moves with changes in assumptions and exchange rates.
Insurer solvency: Solvency II, the SCR and the solvency ratio
Definition
What is the Solvency Capital Requirement (SCR)?
The capital an insurer needs to get through a bad year with 99.5% probability.
Solvency II is the EU’s prudential regime for insurers, in force since January 2016, according to EIOPA, the European insurance authority. It rests on three pillars: quantitative requirements (valuation and capital), governance and risk management, and reporting and disclosure. Under the Solvency II Directive, the SCR is calibrated so that ruin should occur no more often than once in every 200 cases, a 99.5% probability of meeting obligations over the next 12 months. Solvency ratio = eligible own funds ÷ SCR.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: Allianz, results for 2025 (26 February 2026): combined ratio 92.2% against 93.4%, loss ratio 68.3%, expense ratio 23.9%, Solvency II ratio 218% against 209%, CSM €55.7bn against €55.6bn; Berkshire Hathaway, Warren Buffett’s letter to shareholders for 2024 (22 February 2025); IFRS Foundation, IFRS 17 page (effective from 1 January 2023, replaces IFRS 4, CSM, insurance revenue excluding the investment component); EIOPA, Solvency II page (EU prudential regime, in force since January 2016, three pillars); Directive 2009/138/EC, recital 64 (SCR calibration: once in every 200 cases, 99.5% over 12 months). The numbers in the exercises are examples.