What does the loss ratio measure in risk assessment?

The loss ratio is a key metric in risk assessment and insurance management that specifically measures the relationship between losses incurred by an insurer and the premiums earned for providing coverage. It is calculated by dividing the total losses (including claims paid and incurred but not reported claims) by the total earned premiums.

This ratio provides valuable insight into the insurer's operational performance and financial health. A lower loss ratio indicates better profitability and efficiency in risk management, as it suggests that the amount of claims paid out is less than the premium income received. Conversely, a high loss ratio can signal potential issues with underwriting practices or claim management, prompting the insurer to reassess its risk exposure and pricing strategies.

Understanding the loss ratio is crucial for insurance professionals, as it aids in evaluating the adequacy of policy pricing and the potential need for adjustments in coverage. It is a fundamental concept in the industry that allows organizations to manage risk effectively and ensure long-term sustainability.