Polysea

Loss Ratio Calculator

Instantly calculate your insurance loss ratio. Enter incurred losses, loss adjustment expenses, and earned premium to assess underwriting performance.

What is Loss Ratio?

The loss ratio is one of the most fundamental metrics in the insurance industry. It represents the proportion of earned premium that an insurer pays out in claims (incurred losses) and the costs associated with settling those claims (loss adjustment expenses, or LAE).

A lower loss ratio indicates that the insurer is retaining more premium after paying claims, which generally points to profitable underwriting. Conversely, a high loss ratio suggests the insurer is paying out a large share of its premium income, potentially leading to underwriting losses.

Insurance regulators, reinsurers, brokers, and investors all monitor loss ratios closely. It is used to evaluate underwriting discipline, pricing adequacy, reserve sufficiency, and the overall health of a book of business.

Loss Ratio Formula

Loss Ratio = ((Incurred Losses + LAE) / Earned Premium) × 100

Incurred Losses — Total claims paid plus changes in outstanding loss reserves during the period.

LAE (Loss Adjustment Expenses) — Costs incurred to investigate, defend, and settle claims (e.g., legal fees, adjuster fees).

Earned Premium — The portion of written premium that has been “earned” over the coverage period.

For example, if an insurer has $600,000 in incurred losses, $50,000 in LAE, and $1,000,000 in earned premium, the loss ratio would be ((600,000 + 50,000) / 1,000,000) × 100 = 65%.

What is a Good Loss Ratio?

There is no single “good” loss ratio that applies across all lines of insurance. The target loss ratio depends on the line of business, the insurer's expense structure, and expected investment income. However, general guidelines are widely accepted in the industry:

  • Below 60% — Excellent. Indicates strong pricing and favorable claims experience.
  • 60% – 70% — Acceptable. Common target for many commercial lines.
  • 70% – 85% — Concerning. May require rate increases or underwriting tightening.
  • Above 85% — Poor. Likely underwriting loss; corrective action needed.

Benchmarks by Line of Business

Line of BusinessTypical Loss Ratio
Personal Auto60 - 75%
Homeowners55 - 75%
Commercial Property50 - 65%
General Liability55 - 70%
Workers Compensation60 - 75%
Professional Liability50 - 65%

Ranges are approximate industry averages and may vary by geography, portfolio mix, and market cycle.

Frequently Asked Questions

What is a loss ratio?

A loss ratio is a key insurance metric that measures the percentage of earned premium consumed by incurred losses and loss adjustment expenses. It indicates how much of every premium dollar is paid out in claims.

How do you calculate loss ratio?

Loss Ratio = ((Incurred Losses + Loss Adjustment Expenses) / Earned Premium) x 100. For example, if incurred losses are $600,000, LAE is $50,000, and earned premium is $1,000,000, the loss ratio is 65%.

What is a good loss ratio for insurance companies?

A loss ratio below 60% is generally considered excellent. Ratios between 60-70% are acceptable for most lines, while ratios above 85% typically signal unprofitable underwriting. Ideal targets vary by line of business.

What is the difference between loss ratio and combined ratio?

The loss ratio only considers claims-related costs, while the combined ratio also includes operating expenses (the expense ratio). Combined Ratio = Loss Ratio + Expense Ratio. A combined ratio under 100% indicates an underwriting profit.

Why is loss ratio important in insurance?

Loss ratio is one of the most important profitability indicators in insurance. Regulators, reinsurers, and investors use it to assess underwriting performance, price adequacy, and the financial health of an insurer or book of business.

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