Loss ratio
The loss ratio is losses, and often loss-adjustment expenses, divided by earned premium. It is a core measure of underwriting performance.
The NAIC defines the loss ratio as the percentage of incurred losses to earned premiums. In practice, many insurers also include loss-adjustment expenses, the cost of investigating and settling claims, in the numerator. A loss ratio of 60 percent means that 60 cents of every premium dollar earned went to paying claims and related expenses.
The loss ratio shows how well an insurer is pricing and selecting risk. A rising loss ratio can signal underpricing or worsening claims, while a very low ratio may point to room to compete on price. Combined with the expense ratio, it forms the combined ratio, a headline gauge of underwriting profitability.
For example, if a book earns 10,000,000 dollars in premium and incurs 6,500,000 dollars in losses and loss-adjustment expenses, the loss ratio is 65 percent.
Related Terms
Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.