A loss ratio is the relationship of incurred losses (claims paid) compared to premiums collected. It is always presented as a percentage.
Let’s say a pet insurance company paid out $55 million in claims last year and collected $100 million in premium. Their loss ratio would be 55%.
Loss Ratio = $55 million ÷ $100 million = 55%
- Claims Paid: $55 million
- Premium Collected: $100 million
- Loss Ratio: 55%
Loss ratios vary depending on the type of insurance. For pet insurance companies the average loss ratios range from 50% to 60%. That means that for every $1 paid in premium, $0.50 to $0.60 are being spent on claims. However, some companies have loss ratios as high as 70%, which means their paying more in claims than their peers (TRUP).
Loss ratios for health insurance tends to be higher than the loss ratio for property and casualty, such as car insurance.
Loss ratios are an indicator of how well an insurance company is doing. This ratio reflects whether a company is collecting premiums higher than the amount paid in claims or if it is not collecting enough premiums to cover claims. Companies that have high loss claims may be experiencing financial trouble.