Loss Ratio (Schadenquote)
The loss ratio relates the loss expenditure incurred in a period to the premium earned in that period, and is a central metric for assessing underwriting profitability.
Concept
The loss ratio is a central insurance industry metric that relates the loss expenditure incurred in a reporting period – including the change in claims reserves – to the premium earned in the same period. It thus measures the proportion of premium income needed to cover insurance benefits, before taking expenses and investment income into account.
Calculation Variants
Depending on the purpose of the analysis, a distinction is made between the gross loss ratio before reinsurance and the net loss ratio after deducting losses ceded to reinsurers; the loss ratio is also frequently calculated separately by accident year of the loss (an underwriting-year view) or by calendar year of the reserve change, with the latter also including effects from the release or strengthening of reserves for prior accident years.
Relevance as a Management Metric
The loss ratio is usually supplemented by the expense ratio to form the so-called combined ratio, which together reflects the overall underwriting profitability of a portfolio or insurer; a combined ratio below 100% indicates that the underwriting business is profitable before taking investment income into account, while values above 100% indicate an underwriting deficit that must be offset by investment income.