What is a 'loss ratio' in insurance?

A loss ratio is a key performance metric in the insurance industry that reflects the relationship between the cost of claims incurred and the income generated from premiums. Specifically, it is calculated by taking the amount of claims paid and dividing it by the premiums earned. This ratio provides insight into the insurer’s ability to manage risk and profitability; a lower loss ratio indicates that the company is effectively underwriting policies, while a higher loss ratio suggests that the claims costs are eating into the premiums collected.

In this context, understanding the loss ratio is crucial for evaluating an insurer's financial health and operational efficiency. It helps insurers assess how well they are pricing their products relative to the risks they are covering. A balanced loss ratio suggests a stable and potentially profitable insurance operation.