Loss ratio

Loss ratio = incurred losses ÷ earned premium. "Incurred" means claims paid plus the reserves held for open claims; at the company level insurers also add a reserve for incurred but not reported claims. Say a carrier earns $50 million and incurs $32 million (a hypothetical): its loss ratio is 64%. Some versions add loss adjustment expense to the numerator, so ask whether a figure is a pure loss ratio or a loss-and-LAE ratio.

Two audiences use it differently. Investors read an insurer's loss ratio as one half of the combined ratio: loss ratio plus expense ratio, where anything under 100% is an underwriting profit. Business owners meet their own loss ratio. Underwriters build it from your loss runs, comparing the premium you paid over three to five years with the claims incurred. A high ratio can bring a surcharge, a bigger retention or a nonrenewal; a low one is leverage at renewal.

The pitfall is that incurred figures move. A single large open claim can swing an account's ratio, and reserves change as the claim develops, so always note the valuation date. The loss runs: what they are and how to request them guide explains how to get the data, the combined ratio: how insurers make (and lose) money on underwriting shows how insurers make money, and the loss ratio and combined ratio calculator runs the arithmetic.