Loss Ratio and Combined Ratio
Loss Ratio and Combined Ratio Definition
The loss ratio in insurance is the ratio of total losses incurred (paid and reserved) in claims plus adjustment expenses divided by the total premiums earned. The combined ratio is calculated by taking the sum of all incurred losses and expenses and then dividing them by the earned premium. Both terms are used to measure the profitability of an insurance company.
The lower the loss ratio, the more profitable the insurance company, and vice versa. If the loss ratio is over 100 percent, the insurance company is unprofitable because it is paying out more in claims than it is receiving in premiums. In such a case, an insurance carrier may increase your premium or issue a non renewal when your current policy ends.
The combined ratio essentially adds the loss ratio and expense ratio. A ratio below 100 percent means that the insurance company is making profit while a ratio above 100% means that the insurer is paying more money in total expenses than the premiums it receives. However, note that an insurance company can still remain profitable even if the combined ratio is over 100 percent because the combined ratio doesn’t include investment income.
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