Loss Ratio

The Loss Ratio for a policy or group of policies is the percentage of claim payments based on the premium charged. For example, if the premium was £1000 and £600 of claims had been paid, the loss ratio would be 60%.

Loss ratios may calculated against the gross or net premium, and on a written or earned basis.

As loss ratios only take into account claim payments, they do not allow for commissions, insurer costs etc. Therefore a loss ratio must be significantly below 100% for an insurer to make an underwriting profit.

Loss ratios vary based on the class of business, but a typical range for a loss ratio would be 50-70%. Anything below 50% may suggest that the insurer is overcharging policyholders and more competition will enter the market. Anything above 70% may suggest that the insurer is undercharging and will eventually be forced to increase rates.