What Does Loss Ratio Method Mean?
The loss ratio method is a way to calculate how much money an insurance company makes relative to the benefits that it has to pay out. It is used to determine an insurance company’s financial health.
The loss ratio equation is as follows:
Loss ratio = (Benefits paid out + Adjustment expenses) / Premiums collected
Insuranceopedia Explains Loss Ratio Method
Essentially, the loss ratio method lets an insurance company understand how what percentage they can expect to keep of the premiums they collect, as well as what percentage it loses in benefits paid out. For example, if an insurance company pays out $7 million in benefits, but it takes in $10 million in premiums, the the loss ratio would be 70%. This means that the insurance company is keeping 30% of its premiums collected, and paying out 70% of them.