The loss ratio is an insurance term that represents the proportion of claims paid out by an insurer compared to the premium income received. It is expressed as a percentage and is calculated by dividing the total amount of incurred losses and adjustment expenses by the total earned premiums over a certain period. The incurred losses include the amounts paid for settled claims and changes in reserves for claims that have occurred but are not yet settled. Adjustment expenses are the costs associated with processing and handling claims. A high loss ratio indicates that the insurer is paying out a significant portion of its premium income in claims, which could suggest either high claims frequency, severity, or potentially inadequate premium pricing. Conversely, a low loss ratio may imply better underwriting profitability, but it could also result from overpriced premiums. Insurance companies closely monitor their loss ratios, as they are critical for assessing the company’s financial health and underwriting performance.
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