how a loss ratio works
loss ratios vary depending on the type of insurance for example the loss ratio for health insurance tends to be higher than the loss ratio for property and casualty insurance loss ratios help assess the health and profitability of an insurance company a business collects premiums higher than amounts paid in claims and so high loss ratios may indicate that a business is in financial distress unlike auto and homeowners insurance under the aca health insurers do not retain the ability to adjust your insurance premiums based on submitted claims or your medical history types of loss ratiosa health insurance carrier that pays 8 in claims for every 10 in premiums collected has a medical cost ratio mcr of 80 under the affordable care act aca health insurance carriers were mandated to allocate a significant share of the premium to clinical services and the improvement of healthcare quality health insurance providers are required to divert 80 of premiums to claims and activities that improve the quality of care and offer more value to the plan s participants if an insurer fails to spend the required 80 on health care costs it will have to rebate excess funds back to the consumer businesses with commercial property and liability policies are expected to maintain adequate loss ratios otherwise they may face premium increases and cancellations consider a small used car dealer who pays 20 000 in annual premiums to insure their inventory a hailstorm causes 25 000 in damages for which the business owner submits a claim the insured s one year loss ratio becomes 25 000 20 000 or 125 to determine if and for what amount a premium increase is warranted carriers may review claims history and loss ratios for the past five years if the insured has a very brief tenure with the insurer the company may decide that the auto dealer presents an unacceptable future risk at that juncture the carrier may choose not to renew the policy loss ratio vs benefits expense ratiorelated to loss ratios are benefit expense ratios which compares an insurer s expenses for acquiring underwriting and servicing a policy by the net premium charged expenses can include employee wages agent and broker commissions dividends advertising legal fees and other general and administrative expenses g a an insurer will combine the benefit expense ratio with their loss ratio to arrive at a combined ratio while the benefit ratio looks at company expenses the loss to gain ratio looks at paid claims including adjustments compared to the net premium also due to the higher number of probable claims per period losses for healthcare providers will be higher than those for property or casualty insurance the combined ratio measures the flow of money out of a company through the payment of expenses and the total losses as they relate to the income from premiums 