Loss ratio

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Loss ratio

The ratio of losses paid or accrued by an issurer to premiums collected over a year.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Loss Ratio

In insurance, the ratio of what an insurance company pays in benefits and associated expenses (such as adjustments) to what is collected in premiums, expressed as a percentage. It is calculated thusly:

Loss ratio = (Benefits paid out + Adjustment expenses) / Premiums collected

For example, if a company pays out $8,000,000 in benefits and adjustment and collects $10,000,000 in premiums, its loss ratio is 80%. Traditionally, the loss ratio has been used as a gauge for both an insurance company's financial health and whether it was overcharging policy holders. For example, a high loss ratio indicated that the company was not making a reasonable profit, while a low ratio showed that it was either charging too much or covering too little. However, this view has been criticized, at least in relation to health insurance, on the grounds that the integration of insurers and providers makes it difficult or impossible to calculate the ratio properly.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
It must also report annually to DFS on its actual loss ratio, earned premiums, itemized expenses, losses, and reserves.
Our other control variables are the expected loss ratio, [ExpLoss.sub.it], and the lagged actual loss ratio, L/[P.sub.i,t-1], a group policy indicator, [Group.sub.it], and an interaction term, [Group.sub.it] * [Age.sub.it].
Now suppose that six months later, the actual loss ratio on the healthcare index was 75% instead of 65%, due to an unexpected increase in AIDS-related costs, or an unexpected outbreak of a new strain of flu.
First, in some cases the actual loss ratio was a small positive number.
In particular, it is important to focus on the actual loss ratios, since the anticipated loss ratios match closely to the actual for virtually all companies.
Underwriters and others that make up the market for these contracts will form expectations regarding the actual loss ratios on future quarters.