# Loss ratio calculator

A loss ratio calculator is a tool used to determine the ratio between the losses incurred by an insurance company and the premiums it collects. This ratio is a key metric in the insurance industry and is used to assess the financial performance and profitability of an insurance company.

Page written by Ian Hawkins. Last reviewed on June 21, 2024. Next review due October 1, 2025.

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Loss ratio

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## What is a loss ratio?

The loss ratio is a key financial metric used in the insurance industry to measure the percentage of premiums paid out as claims. It indicates the insurer’s ability to underwrite policies profitably and manage risk effectively. A low loss ratio suggests that an insurer is successfully managing claims and operating efficiently.

## How to calculate loss ratio

To calculate the loss ratio, you need two pieces of information:

1. Incurred losses: This refers to the total amount of claims paid out by the insurance company over a specific period.

2. Earned premiums: This represents the total premiums collected by the insurance company during the same period.

The formula to calculate the loss ratio is as follows:

Loss Ratio = (Incurred Losses / Earned Premiums) * 100

Once you have the incurred losses and earned premiums values, simply divide the incurred losses by the earned premiums and multiply the result by 100 to get the loss ratio as a percentage.

In this example, the loss ratio is 40%, indicating that for every dollar of premium collected, the insurance company incurred 40 cents in losses.

Using a loss ratio calculator can help insurance companies evaluate their risk exposure, pricing strategies, and overall profitability.

## What is a good loss ratio?

Generally, a lower loss ratio is preferable, indicating that the insurer is paying out fewer claims relative to the premiums collected. However, what constitutes a good loss ratio can vary based on factors such as the insurer’s business model, risk appetite and market conditions.

## Can the loss ratio be negative?

No, the loss ratio cannot be negative. It represents the ratio of claims paid to premiums earned, so it is always expressed as a percentage between 0% and 100%. A negative loss ratio would imply that the insurer is paying out more in claims than it is collecting in premiums, which does not happen under normal circumstances.

## What are the main reasons for a high loss ratio?

Several factors can contribute to a high loss ratio, including adverse claims experience, inadequate underwriting standards, poor risk management and external factors such as natural disasters or economic downturns. High loss ratios can lead to financial losses for insurers and may indicate the need for adjustments in pricing, underwriting, or claims management strategies.