A ratio that relates losses incurred by an insurance firm to earned premiums (EPs) expressed as a percentage. Loss ratio reflects the amount of money an insurer earns in premium income minus the amount spent in claim payments and administrative costs associated with claim processing. If an insurer pays and reserves $100,000 in claims, and receives $200,000 of premium in a given year, the company’s loss ratio is 50 percent.

Loss ratio = incurred losses/ earned premiums

Loss ratio = $100,000 / $200,000

Loss ratio = 50%

Along with the expense ratio, loss ratios gives an indication of an insurance company’s financial stability. The loss ratio impacts insurance pricing (insurance rates), though for specific types of policies local regulations define earnings and loss margins.

Loss ratio is also known as an underwriting loss ratio.