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📉 '''Loss ratio''' is one of the most closely watched financial metrics in insurance, expressing the proportion of [[Definition:Earned premium | earned premiums]] consumed by [[Definition:Incurred loss | incurred losses]] and [[Definition:Loss adjustment expense (LAE) | loss adjustment expenses]]. Typically stated as a percentage, it provides a direct measure of an [[Definition:Insurance carrier | insurer's]] [[Definition:Underwriting | underwriting]] performance on a given book of business — a 65% loss ratio means that for every dollar of premium earned, 65 cents went to claims. Together with the [[Definition:Expense ratio | expense ratio]], it forms the [[Definition:Combined ratio | combined ratio]], which determines whether an insurer is generating an [[Definition:Underwriting profit | underwriting profit]] or loss.

⚙️ Calculating a loss ratio is straightforward in concept but nuanced in practice. The numerator consists of incurred losses — the sum of [[Definition:Paid loss | paid claims]] plus the change in [[Definition:Loss reserve | outstanding loss reserves]], including [[Definition:Incurred but not reported (IBNR) | IBNR]] provisions — for a defined period. The denominator is earned premiums for that same period. Variations in how these components are measured give rise to different versions of the metric: the [[Definition:Calendar year | calendar year]] loss ratio captures all reserve movements within a financial reporting period, while the [[Definition:Accident year | accident year]] loss ratio isolates the performance of losses originating in a particular year, offering a cleaner view of pricing adequacy. Some analyses also distinguish between the pure loss ratio (losses only) and the loss-and-LAE ratio, depending on whether [[Definition:Allocated loss adjustment expense (ALAE) | allocated]] and [[Definition:Unallocated loss adjustment expense (ULAE) | unallocated]] adjustment expenses are included.

📊 An insurer's loss ratio tells a story that resonates with virtually every stakeholder. [[Definition:Underwriting | Underwriters]] use it to gauge whether their pricing and risk selection are working. [[Definition:Reinsurance | Reinsurers]] scrutinize ceding company loss ratios when negotiating [[Definition:Reinsurance treaty | treaty terms]] and commissions — a [[Definition:Quota share reinsurance | quota share]] arrangement, for instance, may include a [[Definition:Sliding scale commission | sliding scale commission]] that adjusts based on the loss ratio outcome. [[Definition:Rating agency | Rating agencies]] and [[Definition:Insurance regulation | regulators]] track loss ratio trends as indicators of financial stability, and investors evaluate them when assessing the profitability of publicly traded carriers or [[Definition:Insurance-linked securities (ILS) | ILS]] structures. For [[Definition:Managing general agent (MGA) | MGAs]] operating under [[Definition:Delegated underwriting authority (DUA) | delegated authority]], maintaining a loss ratio within the bounds agreed upon with their capacity providers is often existentially important — sustained deterioration can lead to withdrawal of [[Definition:Binding authority agreement | binding authority]] and loss of the program entirely.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Combined ratio]]
* [[Definition:Expense ratio]]
* [[Definition:Incurred loss]]
* [[Definition:Earned premium]]
* [[Definition:Underwriting profit]]
* [[Definition:Accident year]]
{{Div col end}}

Definition:Loss ratio - Revision history

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