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Loss Ratio

The loss ratio is a financial metric used by insurance companies to measure the ratio of claims paid to premiums received. It is calculated by dividing the total claims paid by the total premiums collected. A lower loss ratio indicates that the insurance company is collecting more in premiums than it is paying out in claims, while a higher ratio suggests the company is paying out more in claims, which could signal financial inefficiency or higher risk.

Example

An insurance company has a loss ratio of 70%, meaning it pays out 70% of the premiums it collects in the form of claims, retaining 30% for administrative costs and profit.

Key points

• A metric that measures the ratio of claims paid by an insurance company to the premiums it collects.

• A lower loss ratio indicates greater profitability, while a higher ratio suggests more claims relative to premiums.

• Used to assess the financial health and risk exposure of insurance companies.

Quick Answers to Curious Questions

It is calculated by dividing the total claims paid by the total premiums received, indicating how much of the collected premiums are paid out in claims.

It helps assess the financial health and profitability of an insurer, showing how efficiently it is managing claims relative to premiums.

A high loss ratio indicates that the company is paying out a significant portion of its premiums in claims, which could signal higher financial risk.