what does the elr method tell you 
insurers set aside a portion of their premiums from underwriting new policies in order to pay for future claims the expected loss ratio is used to determine how much they set aside it s also important to note that the frequency and severity of the claims they expect to experience also plays a role insurers use a variety of forecasting methods in order to determine claims reserves in certain instances such as new lines of business the elr method may be the only possible way to figure out the appropriate level of loss reserves required the elr method can also be used to set the loss reserve for particular business lines and policy periods the expected loss ratio multiplied by the appropriate earned premium figure will produce the estimated ultimate losses paid or incurred however for certain lines of business government regulations may dictate the minimum levels of loss reserves required example of how to use expected loss ratio elr methodinsurers can also use expected loss ratio to calculate the incurred but not reported ibnr reserve and total reserve the expected loss ratio is the ratio of ultimate losses to earned premiums the ultimate losses can be calculated as the earned premium multiplied by the expected loss ratio the total reserve is calculated as the ultimate losses less paid losses the ibnr reserve is calculated as the total reserve less the cash reserve for example an insurer has earned premiums of 10 000 000 and an expected loss ratio of 0 60 over the course of the year it has paid losses of 750 000 and cash reserves of 900 000 the insurer s total reserve would be 5 250 000 10 000 000 0 60 750 000 and its ibnr reserve would be 4 350 000 5 250 000 900 000 the difference between the elr method and the chain ladder method clm both the elr and the chain ladder method clm measure claim reserves where the clm uses past data to predict what happens in the future while the expected loss ratio elr is used when there s little past data to go off of clm is used for stable businesses and business lines limitations of using the elr methodthe amount of claims reserves that an insurer should set aside is determined by actuarial models and forecasting methods insurers often use the expected loss ratio on the amount and quality of data that is available it is often useful in the early stages of forecasting because it does not take into account actual paid losses but in later stages this lack of sensitivity to changes in reported and paid losses makes it less accurate and thus less useful learn more about the expected loss ratio elr methodsee more about calculating the profitability of insurance companies with loss and combined ratios 