How this calculator works
The loss ratio is the share of earned premiums paid out in claims. It answers a blunt question: for every dollar of premium collected, how much went to policyholders? Claims alone are not the whole cost, because the insurer also spends money investigating and settling them, so loss adjustment expenses are added to the numerator. A loss ratio of 65% means 65 cents of every premium dollar went to claims and their handling, leaving 35 cents for underwriting expenses and, if anything is left, profit. The ratio is usually computed before or after reinsurance and should say which; the two are very different pictures. It is also sensitive to the accounting period. Premiums are earned over the life of a policy while claims arrive on their own schedule, so a quarter with a large catastrophe can distort the figure badly. For that reason insurers look at the ratio over several years and across a whole book of business, not one line at a time. A low loss ratio is not automatically good: it can mean the insurer is charging too much and will lose customers to cheaper competitors.
Formula
Loss ratio = (claims paid and reserved + loss adjustment expenses) / premiums earned. Claims = loss ratio x premiums earned - loss adjustment expenses. Premiums needed = (claims + loss adjustment expenses) / loss ratio.
Worked example
An insurer earns $1,000,000 of premiums, pays $600,000 of claims and spends $50,000 on loss adjustment. The loss ratio is $650,000 / $1,000,000 = 65%. To reach a 70% ratio with $600,000 of claims and $50,000 of adjustment expenses, the insurer needs $650,000 / 0.70 = $928,571 of premiums. At a 60% target with $1,000,000 of premiums, claims could be 0.60 x $1,000,000 - $50,000 = $550,000.
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Frequently asked questions
Does the loss ratio include expenses?
It includes the cost of handling claims, called loss adjustment expenses. It does not include the cost of selling and administering policies, which is captured by the expense ratio. Add the two for the combined ratio.
Should the ratio use gross or net figures?
State which. Gross of reinsurance shows the whole book; net shows what the insurer retains after reinsurers share the claims and premiums. A ceded reinsurance programme can change the ratio in either direction.
Why do loss ratios differ by insurance line?
Because the underlying risks differ. Health and workers compensation lines often run at high loss ratios, while some property lines run lower, and each line has a different expense structure. Compare within a line and a market.
Can the loss ratio be above 100%?
Yes, when claims and their handling exceed premiums earned. That is a bad year on underwriting and is usually covered by investment income or reserves. Catastrophe years can push a property book well above 100%.