Loss ratio is the ratio of claims incurred by the insurance company to amount of premiums earned by it.
Loss ratio is the ratio that you will find in almost all the sheets and is the most amazing way to quantify the profitability.
If someone said to you that the LR is 180%, it means that the LR is completely yikes and the company should close the business, but consider this that the company has LR of 20% (in another business, of almost same EP) and this satisfies the LR to 100%.
Loss Ratio = Claims Incurred for the year (ultimate losses for the company)/ Earned Premium for the year
We have already explained both of these components in our earlier exercise. You will generally see a LR of 75% – 92%. In India, the TP loss ration mostly remains above 100% for most of the companies, and it is one of the mandatory offering by the regulator i.e. IRDAI
In simple language, a high loss ratio is an indicator of financial distress and indicates that for each dollar of premium earned, the company is shelling a high sum of money as claims paid to policyholders.
Questions Related to Loss Ratio
Loss ratio is the ratio of claims paid by the insurance company to amount of premiums earned by it.
Loss Ratio = Claims Incurrred (paid + change in o/s) / Earned Premium