loss ratio and medical loss ratio

Suppose a health plan collects 100 in premium from a member over a year and pays out 82 in claims. A simple, powerful question is: what fraction of the money coming in goes back out as claims? That fraction is the loss ratio — here 82%. It is the single most-watched number in health insurance, because it tells you at a glance whether premiums are roughly in line with the care being paid for.

Loss ratio = incurred claims / earned premium. A ratio near or above 100% means claims are eating all the premium (and there is nothing left for expenses or profit — a sign rates are too low or claims surged); a very low ratio might mean rates are too high relative to claims. The medical loss ratio (MLR) is a regulated version used in some markets: it is the share of premium spent on medical claims plus quality-improvement activities, and law may require it to be at least a minimum (commonly 80% for individuals/small groups, 85% for large groups). If an insurer's MLR falls below the floor, it must rebate the difference to policyholders.

Actuaries use the loss ratio constantly: to monitor whether a block of business is performing as priced, to set and justify rate changes, and, where MLR rules apply, to ensure compliance and estimate rebates. But it must be read carefully — the 'right' loss ratio depends on the expense and profit loadings built into the premium, and a single year's ratio can be distorted by timing, by claims not yet reported, or by one large case. It is a thermometer, not the whole diagnosis.