How the Loss Ratio Calculator works
The loss ratio is one of the core underwriting metrics an insurer uses to judge whether the premium it collects on a book of business is covering the claims it pays out. It compares money paid (or reserved) for claims against the premium the insurer has actually earned during the same period, expressed as a percentage.
The formula
Loss Ratio = (Incurred Losses + Loss Adjustment Expenses) / Earned Premium × 100
Incurred losses are claims already paid plus reserves set aside for claims reported but not yet settled. Loss adjustment expenses (LAE) are the costs of investigating, defending, and settling those claims — adjuster salaries, legal fees, and appraisal costs. Earned premium is the portion of written premium the insurer has "earned" by providing coverage for the period so far, which is not the same as premium billed or collected.
Worked example
Take an insurer with $650,000 of incurred losses, $50,000 of loss adjustment expenses, and $1,000,000 of earned premium for the period. The loss ratio is ($650,000 + $50,000) / $1,000,000 = 70%. If underwriting expenses (commissions, overhead, and other acquisition costs) add another $250,000, the expense ratio is $250,000 / $1,000,000 = 25%, giving a combined ratio of 70% + 25% = 95% — a 5-point underwriting margin before investment income.
Reading the combined ratio
- Below 100%: premiums exceeded losses and expenses — an underwriting profit on the business written.
- Exactly 100%: premiums exactly covered losses and expenses — break-even underwriting.
- Above 100%: losses and expenses exceeded premiums — an underwriting loss that the insurer must offset with investment income to remain profitable overall.
What the loss ratio does not capture
The loss ratio and combined ratio measure underwriting results only. They exclude investment income earned on premium reserves and float, taxes, and one-time items, so a combined ratio slightly above 100% does not automatically mean the company as a whole lost money. Acceptable loss ratio targets also vary by line of business — a homeowners book and a workers' compensation book will run different "normal" ranges — so compare results against the same line of business and time period rather than an absolute standard.