Question

How are the Loss and Expense Ratios of a Property & Liability insurance company calculated, and what do each ratio measure? Why should Your Firm want to know the ratios of any insurance company proposing to write coverage for Your Firm? (write in a paragraph)

Answer 1

Loss ratio:

Simply we can say that loss ratio is the ratio representing the amount of money paid to the isured divided by the amount of premium insurance company recieve from the insured.

Simply,

Loss ratio = (amount os money paid as insurance claims + adjusted expenses)/total premium earned from the insured

Here, by adjusted expenses we can relate it to the cost of investigation that incur during the settlement process.

For an example;

Theoritically

If an isurance company pays $7 as insurance claim for every $10 which is collected as premium, then the loss ratio would be 70%.

Expense ratio

Now, let us look at expense ratio:

we can simply say that expense ratio is the cost that a compny incurrs in underwritting, advertising and various other costs that are associated to sell a product (e.g. cost of aquiring, wages to employess, servicing an insurance policy, reinsurance etc.) devided by the total premium they obtained from their policies.

Key Points regarding loss ratio and expense ratio:

• A high loss ratio indicates that the company has paid excess of claim amount then the actual premium they recieved from their policy, in such cases when the loss ratio is high then company used to increase the premium of a policy or find some other way to renew a policy.
• Low loss ratio means that the ompany paid less claims against the premium recieved.
• Lower the expense ration better will be the company profitability.