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📊 '''Loss ratio method''' is an actuarial reserving technique used in insurance to estimate ultimate [[Definition:Incurred losses | incurred losses]] by applying an expected [[Definition:Loss ratio | loss ratio]] to [[Definition:Earned premium | earned premium]] for a given [[Definition:Accident year | accident year]] or [[Definition:Underwriting year | underwriting year]]. Rather than relying heavily on actual emerged [[Definition:Claim | claims]] data — which may be sparse in early development periods — this method leans on a predetermined ratio that reflects the insurer's pricing assumptions or industry benchmarks. It is sometimes called the "expected loss ratio method" and is one of several approaches [[Definition:Actuary | actuaries]] use when building [[Definition:Claims reserve | reserve]] estimates.

🔧 In practice, an actuary selects an expected loss ratio based on [[Definition:Underwriting | underwriting]] assumptions, historical experience, or [[Definition:Benchmark | benchmark]] data for the relevant [[Definition:Line of business | line of business]]. This ratio is then multiplied by the earned premium for the period under review to produce an estimate of total expected losses. As an example, if an insurer writes $10 million in earned premium on a [[Definition:Commercial property insurance | commercial property]] book and the expected loss ratio is 60%, the method projects $6 million in ultimate losses. The technique is particularly valuable for immature books of business, new product launches, or situations where actual [[Definition:Loss development | loss development]] patterns have not yet stabilized enough to anchor methods like the [[Definition:Chain-ladder method | chain-ladder method]].

📌 One of its chief strengths is stability — because the estimate is anchored to premium rather than volatile early claims data, it avoids the wild swings that development-based methods can produce in the first few reporting periods. However, that same detachment from actual experience becomes a weakness over time: if real losses diverge significantly from expectations, the loss ratio method will not self-correct the way data-driven techniques do. For this reason, most [[Definition:Reserving | reserving]] exercises blend it with other methods, weighting the loss ratio approach more heavily in early periods and shifting toward experience-based methods as credible data accumulates. Regulators and [[Definition:External auditor | external auditors]] expect to see this kind of reasoned judgment in the [[Definition:Actuarial opinion | actuarial opinions]] supporting an insurer's carried reserves.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Loss ratio]]
* [[Definition:Chain-ladder method]]
* [[Definition:Bornhuetter-Ferguson method]]
* [[Definition:Claims reserve]]
* [[Definition:Incurred but not reported (IBNR)]]
* [[Definition:Earned premium]]
{{Div col end}}

Definition:Loss ratio method - Revision history

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