Loss Ratio

The loss ratio is the difference between ratios or amount of premium received by the insurance company and the claims settled by the company or the amount the insurance company has paid out on the behalf of the claimant for claims. For example if a company has a paid loss ratio of 50% this means the insurance company has paid 50% of the premiums they have collected from a policy holder. The loss ratio does not include the insurance company's costs, which can be as high as an additional 25-35%. A policyholder that has never filed a claim has a 0% incurred loss ratio.

If a company is collecting premiums which are more than the amount paid in claims and their expenses are low, it means they will be making a profit. If a company, however, has a high loss ratio then they may not be collecting enough money in premiums to pay all of their claims plus the company's expenses. In this case, they will not make a reasonable profit and it may be difficult for them to remain in business.