The loss ratio is an important insurance KPI that measures how much money an insurer pays out in claims compared to the amount of premiums it collects, indicating its financial soundness and efficiency. The loss ratio measures how much money an insurance company pays out in claims and other related expenses compared to the amount of premiums it collects. It is used to measure an insurer's financial soundness and underwriting results.
The loss ratio formula is calculated by dividing total losses/claims paid in a given period of time by the total premiums earned in that same period. This can be expressed as a percentage, showing how much of an insurer's income is being used to pay claims and other expenses (such as taxes).
The loss ratio indicates whether an insurer is using its resources efficiently, if it is overpaying or underpaying on claims, and if it has set its premiums at the right level. If an insurer's loss ratio is too high, it could be an indication that the insurer is paying out more than it should in claims or has set its premiums too low. On the other hand, if an insurer's loss ratio is too low, it could indicate that the company is denying legitimate claims.
Insurers strive for an acceptable loss ratio, which will vary from one industry to another. This number is often set at between 50-65%, as this indicates that the company is paying out claims efficiently and has set its premiums appropriately. High loss ratios can harm an insurer’s financial stability, whereas low ones could be a sign of underwriting