Full Definition
Loss ratio is the percentage of premium income that an insurer pays out in claims. It is calculated as incurred losses (paid claims + change in reserves) divided by earned premium. A 60% loss ratio means the insurer pays $0.60 in claims for every $1.00 of premium collected. Combined with the expense ratio (operating costs as a percentage of premium), the loss ratio produces the combined ratio — the primary measure of underwriting profitability. A combined ratio below 100% indicates underwriting profit; above 100% indicates underwriting loss. For policyholders, understanding your loss ratio relative to your industry helps in renewal negotiations and carrier selection.
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