Loss Ratio
What is Loss Ratio?
A loss ratio is a term that is important for insurance companies. In insurance, the loss ratio is the ratio of total losses paid out in claims plus adjustment expenses divided by the total earned premiums. Loss ratio enables insurance companies to determine the overall profitability of the policies that they are issuing. Such companies are collecting significantly more premium than is paid out in claims. Conversely, insurers that consistently experience high loss ratios may be in poor financial health.
The loss ratio equates the amount of money that an insurance company expenditure on insurance claims to the amount of money that the insurance company takes in by premium payments.
In addition to allow for insurance companies with an exact measure of the relationship among their premiums and claims, loss ratios also enable insurance companies to make very simple calculations when conceive a change in premiums.
To calculate this change, a company can merely separate the actual experienced loss ratio (AER) by the target ratio to arrive at another percentage that will indicate the allow rate change. For instance, if client’s AER is 40 % and the balance point is 50 %, then the client’s premium should be 80 percent of its current amount, which means it should reduction by 20 percent. However, if the AER were 60 percent, then the premium should gain by 20 percent.
Trouble also can arise, though, if it is too low, coz a low loss ratio might suggest to customers that the insurance company is appoint excessive premiums or not adequately paying customers’ claims.
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