loss ratio

Of every dollar of premium an insurer collects, how much goes straight back out as claims? That single fraction is the loss ratio, and it is the first number anyone looks at to judge whether an insurance business is healthy. Collect 100 in premium, pay 70 in claims, and the loss ratio is 70 percent. It is the heartbeat of P&C performance.

Precisely, the loss ratio is losses (and usually loss adjustment expense) divided by earned premium for the same period: loss ratio = (incurred losses + LAE) / earned premium. 'Incurred losses' means claims for that period whether already paid or still reserved, so it captures the full cost even of claims not yet settled. Note the denominator is EARNED premium, matched to the period — using written premium would mismatch revenue and risk. A line with 70,000,000 of incurred loss-and-LAE on 100,000,000 of earned premium runs a 70 percent loss ratio.

The loss ratio matters because it isolates the core insurance result — the cost of the risk — before expenses and investment income. Combined with the expense ratio it builds the combined ratio, the headline profitability gauge. Actuaries use it to set rates (the expected loss ratio drives the rate indication), to spot a line going sour, and to compare years. Two honest caveats: a single year's loss ratio swings with luck and with reserve estimates (incurred losses include guesses about unsettled claims), and a low loss ratio alone does not mean profit if expenses are high — that is why the combined ratio exists.