Expected Loss Ratio
What Does Expected Loss Ratio Mean?
An expected loss ratio is a way of determining how much money earned from premiums an insurer should set aside to pay for future claims. The amount is not fixed, but based on probability and actuarial forecasts that attempt to predict the number and severity of claims the insurer will have to pay.
Insuranceopedia Explains Expected Loss Ratio
The premiums charged by an insurance company are mostly based on projected future claims (along with operating expenses and profit). Thus, a portion of the paid premium goes to a reserve that ensures the insurer can pay a claim. As a method for calculating future claims, expected loss ratio is often used for new insurance products that don’t have a large enough sample size to make an accurate forecast. Once the product has been sold for a while, this method will be replaced by one based on the number of claims filed by those who have actually purchased the insurance product.