A ratio that relates losses incurred by an insurance firm to earned premiums (EPs) expressed as a percentage. Underwriting loss ratio (or simply, loss ratio) reflects the amount of money an insurer earns in premium income minus the amount spent in claim payments and administrative costs associated with claim processing. If an insurer pays and reserves $100,000 in claims, and receives $200,000 of premium in a given year, the company’s loss ratio is 50 percent.
Underwriting loss ratio = incurred losses/ earned premiums
Underwriting loss ratio = $100,000 / $200,000
Underwriting loss ratio = 50%
Along with the expense ratio, underwriting loss ratio gives an indication of an insurance company’s financial stability. The loss ratio impacts insurance pricing (insurance rates), though for specific types of policies local regulations define earnings and loss margins.
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