Loss Ratio

The loss ratio compares how much an insurer pays out in claims to how much premium it has earned over the same period. It works as a quick measure of underwriting performance: if claims are high relative to premium, the ratio rises; if claims are low, the ratio falls. Because both amounts are in money terms, the quotient tells you what share of premium is being used to cover losses.

Use this formula in insurance to assess the profitability or riskiness of a product line, policy block, or reporting period. It is also useful for comparing different insurers, classes of business, or years on a consistent basis.

• Using written premiums instead of earned premiums when the question asks for loss ratio
• Including expenses like commissions or administration costs in the claims amount
• Forgetting to convert the decimal result into a percentage when reporting the ratio