The loss ratio is used by insurance and reinsurance companies. It is calculated as follows: cost of claims divided by premiums.
It can be taken individually or globally – i.e. for each insured – or to determine the profitability of the activity.
The Loss ratios vary depending on the type of insurance. For example, the loss ratio for Health insurance tends to be higher than the loss ratio for Property and Casualty insurance.
Loss ratios help assess the health and profitability of an insurance company. A business collects premiums higher than amounts paid in claims – therefore, high loss ratios may indicate that a business is in financial distress.