Loss ratio

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Loss ratio

The ratio of losses paid or accrued by an issurer to premiums collected over a year.

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.
References in periodicals archive ?
Column 2 shows the relative volatility in the expected loss ratios to the actual loss ratios, and column 3 shows the relative volatility in the computed normal losses to the actual losses.
At the end of each period, the Insurance Services Office (an independent actuarial organization) calculates the actual loss ratios, and property and casualty underwriters then incur gains or losses as they sell catastrophe futures contracts previously purchased.
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.