Loss ratio

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Related to Actual Loss Ratios: Paid Loss Ratio

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 ?
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.
Now suppose that the eastern seaboard of Florida was in fact severely hammered by hurricanes to an unexpected degree in the third quarter, causing the actual loss ratios for the company and the CBOT pool to be 10 percent and 9 percent, respectively.