Loss ratio

The loss ratio is the share of premium an insurer collects that it pays back out in claims. It is calculated as incurred losses / earned premium, usually over a policy year or accounting period, and is one of the most closely watched profitability signals in insurance.

A loss ratio below 100% means claims paid were less than premium collected, leaving room to cover operating expenses and profit; a ratio above 100% means the insurer paid out more in claims than it earned in premium on that book of business, before expenses are even counted. The loss ratio differs from the combined ratio, which adds underwriting and operating expenses to losses, giving a fuller view of whether a line of business is profitable overall.

Insurers track loss ratio by product line, region, and cohort to price policies, evaluate reinsurance needs, and flag lines of business that are deteriorating. It is a direct output of claims analytics and a key input to actuarial modeling and rate-setting. A common pitfall is comparing loss ratios across lines or insurers without adjusting for differences in policy mix and risk adjustment, since a low ratio can simply mean an insurer is under-pricing risk it hasn't yet had to pay out on, rather than managing it well.