Loss Ratio

Loss ratio in auto insurance refers to the ratio of total losses paid out by an insurance company on claims versus the total of premiums earned in the same time period. For example, a loss ratio calculator will find that an auto insurance company that collects $1 million in premiums but pays out $500,000 in claims will have a loss riot of 50 percent. The ideal loss ratio for an insurance company is between 40 and 60 percent.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Jun 22, 2021

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Loss ratio in auto insurance refers to the percentage of total losses paid out by an insurance company on claims versus the total of premiums earned in the same period.

For example, a loss ratio calculator will find that an auto insurance company that collects $1 million in premiums but pays out $500,000 in claims will have a loss riot of 50 percent. The ideal loss ratio for an insurance company is between 40 and 60 percent.

In the insurance industry, a loss ratio is defined as the ratio of the total losses paid out by an insurance company on claims received (plus any adjustment expenses necessary to facilitate this) divided by the total of the premiums earned by the insurer in the same period.

loss ratio

This figure is very easy to calculate. For example, an insurance company collects $1 million in premiums and then pays out $500,000 in claim payments. The loss ratio will be 50%.

And if the same company were instead to pay out $1.5 million in claim payments, the loss ratio would be 150%.

What is an acceptable loss ratio?

All insurance companies will have a loss ratio, whether it’s for someone’s personal lines insurance or senior car insurance. As it is unlikely that all policyholders will fail to make a claim across the period of their policy. Otherwise, insurance would be unnecessary, and there would be no insurance companies.

In the auto and property insurance industries, the normal loss ratios are between 40% and 60%, and this shows that the companies themselves are properly conducting themselves and collecting more in premiums than they are paying out in claims, thus making a profit for themselves and their shareholders.

Health insurance companies face different risks, and loss ratios tend to be higher than in other areas of insurance, with a percentage range of 60% to 110% not being uncommon for insurers working in this area.

Insurers with loss ratios that are consistently too high are probably having problems with their financial health. They are not collecting enough in premiums to balance their ongoing payments, a situation which, if not remedied, will eventually result in insolvency.

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What is a target loss ratio?

A target or sometimes permissible, balance point, or expected loss ratio is a term used to refer to the loss ratio at which an insurer needs to operate at or below to fulfill their profit objectives.

This is usually calculated at a level of 1, and has the expense ratio subtracted from it. The expense ratio shows the level of expense that an insurer needs to maintain its normal business operations and includes various contingencies and expenses.

An insurer that consistently meets its target loss ratio is well managed with a risk management strategy that enables consistent profitability.

Additional Loss Ratio Definitions

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