The percentage of insurance premiums used to pay for an insurer’s expenses, including overhead, marketing and commissions. Expense ratio is calculated as underwriting expense divided by net premiums earned.
More specifically, the expense ratio is money used in acquiring, writing and servicing an insurance policy. Business expenses like advertising, used to attract customers; commissions, used to pay insurance agents, brokers and employees; and taxes, paid on insurer earnings, are all examples of expense ratio costs.
Some insurers have low expense ratios, either because they employ direct-sale techniques and cut out the middlemen, or because their brand is already well known and advertising expenses are minimal. Others aren’t as well known and must spend more to attract and service customers.