Loss Ratio Calculator - Understand Your Insurance Profitability

Loss ratio is a key performance metric in the insurance industry. It helps you understand how much of the premiums collected are being paid out in claims and related expenses.

Formulas & Equations

1. Loss Ratio

$\text{Loss Ratio ( \%)}=\left(\frac{\text{Claims Paid}+\text{Loss Adjustment Expenses}}{\text{Premiums Earned}}\right)\times 100$

2. Combined Ratio

Combined Ratio adds underwriting expenses to the loss ratio. If underwriting expenses are not included, you can use:

$\text{Combined Ratio (\%)}=\text{Loss Ratio (\%)}+\text{Expense Ratio (\%)}$

For simplicity, if you only focus on loss ratio and LAE (which is often a part of total expenses), the calculator might assume:

$\text{Combined Ratio (\%)}\approx \text{Loss Ratio (\%)}\left(\text{if no separate expense ratio is used}\right)$

Example Calculation

Suppose:

1. Premiums Earned = $500,000
2. Claims Paid = $300,000
3. Loss Adjustment Expenses = $50,000

Step 1: Loss Ratio

$\text{Loss Ratio}=\left(\frac{300000+50000}{500000}\right)\times 100=70\%$

Step 2: Combined Ratio (if no other expenses)

$\text{Combined Ratio}=70\%$

If you add a separate expense ratio (say 25%), then:

$\text{Combined Ratio}=70\%+25\%=95\%$

Interpretation

• Loss Ratio < 100% → Profitable on underwriting
• Loss Ratio > 100% → Paying more in claims than earning in premiums

FAQs

What is a loss ratio in insurance?

Answer: A loss ratio is the percentage of insurance premiums paid out in claims and loss adjustment expenses. It helps insurers measure how efficiently they are managing risk and payouts.

What is a good loss ratio?

Answer: A good loss ratio is typically below 100%, indicating the insurer is collecting more in premiums than it pays out in claims. A loss ratio of 60%–70% is considered healthy in many insurance sectors.

What’s the difference between loss ratio and combined ratio?

Answer: The loss ratio includes claims and related expenses, while the combined ratio adds underwriting expenses to the loss ratio. The combined ratio offers a more complete picture of an insurer’s overall financial performance.