Loss Ratio

"Loss Ratio" is a formula to determine profitability of an underwriting business. Generally, it compares premium received and claims dollars paid out plus reserved for future payout, usually measured annually. For example, if an underwriter takes in $100 in premium and pays out $5 in claims and reserves another $5, the loss ratio is 10% which is very good. Variations are "net" loss ratio, which reduces premium received by other costs, such as commissions paid, and the lower number is used for the calculation. So, as above, if the $100 in premium included 20% in commissions, then the "net" loss ratio would be 100-20=80 with $10 in claims or a 12.5% net loss ratio.