Loss Ratio

Loss Ratio

What is the loss ratio?

The loss ratio is an insurance metric that compares claims paid (including adjustment expenses) to premiums earned. It shows what portion of premium income an insurer pays out for policyholder claims.

Formula:
loss ratio = (claims paid + adjustment expenses) / earned premiums

Example: If a company pays $80 in claims for every $160 in premiums collected, the loss ratio is 50% (80 ÷ 160).

How to interpret it

• Low loss ratio: insurer retains more premium relative to claims (may indicate profitability but could also suggest underpaying claims).
• High loss ratio: a larger share of premium is paid out as claims; persistently high loss ratios can signal financial stress and may lead insurers to raise premiums or decline renewals.
• A loss ratio above 100% means claims exceed premiums for the period.

Typical ranges

• Health insurance: generally higher loss ratios (commonly around 80–90%).
• Property & casualty insurance: typically lower, often in the 50–70% range, though this varies by line and segment.

Types of loss ratios

Medical loss ratio (MLR)
– Applies to health insurers.
– Measures the share of premiums spent on clinical services and activities that improve healthcare quality.
– Regulatory rules (e.g., the 80/20 rule) require insurers to allocate a prescribed minimum share of premiums to care and quality improvement; if they fall short, they must rebate the difference to policyholders.

Commercial/property & casualty loss ratio
– Applies to business insurance (property, liability, commercial auto).
– Example: A business paying $20,000 in premiums suffers $25,000 in insured losses; loss ratio = 125% (25,000 ÷ 20,000). High loss ratios can prompt premium increases or nonrenewal, especially when reviewing multi-year claims history.

Loss ratio vs. benefit-expense ratio and combined ratio

• Benefit-expense ratio: insurer expenses for acquiring, underwriting, and servicing policies (commissions, wages, advertising, G&A) divided by net premium.
• Combined ratio: loss ratio + benefit-expense ratio. It measures total outflows (claims + operating expenses) relative to premium income.
• Combined ratio < 100%: underwriting profit.
• Combined ratio > 100%: underwriting loss (insurer paying out more in claims and expenses than it earns in premiums).

Key takeaways

• The loss ratio reveals how much of premium income funds claims and related adjustment costs.
• Interpretation depends on the insurance line; health insurance typically has higher loss ratios than property & casualty.
• Regulators may mandate minimum spending on benefits (e.g., health MLR rules), and insurers with sustained high loss ratios may raise premiums or refuse renewals.
• Insurers use the loss ratio together with expense measures to evaluate underwriting performance via the combined ratio.