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📋 '''Net loss ratio''' is an [[Definition:Underwriting | underwriting]] performance metric that expresses an [[Definition:Insurance carrier | insurer's]] net [[Definition:Incurred loss | incurred losses]] and [[Definition:Loss adjustment expense (LAE) | loss adjustment expenses]] as a percentage of [[Definition:Net premium earned | net premiums earned]]. The word "net" is critical: both the numerator and denominator have been adjusted to reflect the impact of [[Definition:Reinsurance | reinsurance]]. Losses ceded to reinsurers are subtracted from gross incurred losses, and premiums ceded under [[Definition:Reinsurance treaty | reinsurance treaties]] are subtracted from gross premiums earned, leaving the ratio that represents the carrier's own retained loss experience.

⚙️ Computing the net loss ratio requires reliable data on several moving parts. The numerator combines paid losses, changes in [[Definition:Loss reserve | case reserves]], and movements in [[Definition:Incurred but not reported (IBNR) | IBNR reserves]], all reduced by [[Definition:Reinsurance recovery | reinsurance recoveries]] and [[Definition:Subrogation | subrogation]] receipts. The denominator is [[Definition:Gross premium | gross premiums]] earned minus [[Definition:Ceded premium | ceded premiums]] earned. Because reserve estimates evolve over time — especially in [[Definition:Long-tail business | long-tail lines]] like [[Definition:General liability insurance | general liability]] or [[Definition:Workers' compensation insurance | workers' compensation]] — the net loss ratio for a given accident year can develop favorably or adversely for years after the policies expire. Analysts therefore distinguish between the calendar-year net loss ratio, which captures all reserve movements booked during the reporting period, and the accident-year net loss ratio, which tracks losses attributable to events occurring in a specific year.

📈 When paired with the [[Definition:Net expense ratio | net expense ratio]], the net loss ratio produces the [[Definition:Combined ratio | combined ratio]], the single most watched indicator of an insurer's underwriting profitability. A net loss ratio consistently above the level assumed in [[Definition:Technical pricing | technical pricing]] erodes [[Definition:Policyholder surplus | surplus]] and signals that either the book of business is underpriced, claims management is underperforming, or the reinsurance program is not adequately protecting the portfolio. Conversely, favorable development — where prior-year reserves prove more than sufficient — can pull the net loss ratio down, boosting reported results. [[Definition:Rating agency | Rating agencies]] and [[Definition:Reinsurance | reinsurers]] both scrutinize net loss ratio trends when evaluating a company's risk profile, and a carrier that cannot demonstrate a stable or improving ratio over multiple years will find it increasingly difficult to secure capacity at competitive terms.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Combined ratio]]
* [[Definition:Net expense ratio]]
* [[Definition:Incurred loss]]
* [[Definition:Loss reserve]]
* [[Definition:Net premium earned]]
* [[Definition:Accident year]]
{{Div col end}}

Definition:Net loss ratio - Revision history

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