Definition:Loss ratio (L/R): Difference between revisions
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▲🔢 '''Loss ratio (L/R)''' is a fundamental measure of insurance profitability, calculated by dividing incurred losses (claims paid plus changes in reserves) by earned premiums over a given period and expressing the result as a percentage. A loss ratio of 60%, for example, means that for every dollar of premium earned, sixty cents went toward claims. Insurers, reinsurers, and analysts track loss ratios at multiple levels — by line of business, by program, by underwriting year, and across the enterprise — to assess whether pricing is adequate relative to the risks being assumed.
📈 Interpreting a loss ratio requires context. A 70% ratio might be perfectly healthy for a long-tail liability line with low acquisition costs but alarming for a property program that also carries a 35% expense load. Analysts therefore pair the loss ratio with the expense ratio to produce the combined ratio; a combined ratio below 100% signals an underwriting profit before investment income. Loss ratios can also be viewed on different bases — accident year, calendar year, or policy year — each offering a different lens on when losses are developing and how prior-year reserves are performing.
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