Loss Ratio

The loss ratio shows how much of each unit of premium is spent on paying claims. It is one of the most important measures of an insurer's underwriting performance.

For example, an insurer that earns 100 million in premiums and incurs 65 million in claims has a loss ratio of 65%.

A lower loss ratio generally means the insurer is more profitable on its underwriting, since less of its premium income goes on claims. However, a very low loss ratio could mean premiums are too high, which may attract regulatory attention in some markets or lose customers to competitors.

The loss ratio does not include the insurer's operating costs, such as staff, commissions and administration, which are measured by the expense ratio. Adding the two gives the combined ratio. A combined ratio below 100% means the insurer makes an underwriting profit; above 100% means it pays out more in claims and expenses than it collects in premiums, although it may still be profitable thanks to investment income.

In some markets, such as US health insurance, regulators require insurers to spend a minimum share of premiums on medical care, which effectively sets a minimum loss ratio.