How to calculate Claims Loss Ratio example

Time and again I encounter insurance firms that fail to capitalise on claims loss ratio data. They:

  1. Do not have the insurance software tools to view reliable Loss Ratios automatically or quickly across all of their accounts.
  2. Are not taking the time to put those tools in place.
  3. Are not able to automatically tweak rates and fees at policy renewal based on Loss Ratios, without manual intervention.
  4. Don’t analyse Loss Ratios for individual policy sections or risk areas.
  5. Don’t educate junior staff to ensure they understand the importance of loss ratios and how to manage and compare them.

Not having instant access to loss ratios at a specific level (e.g. per risk area per policy per policy-year) and a general level (e.g. for a new scheme as it grows by the hour) is damaging to businesses since they often cannot spot the poorly performing areas or new behaviour patterns of their best sub-brokers until it is too late.

In this article I will investigate Loss Ratios (or CLRs: “Claims Loss Ratios”), in the following ways:

  1. What are Loss Ratios?
  2. Why are Loss Ratios so important?
  3. Calculating Loss Ratios
  4. How the experts make CLRs work tor them
  5. Common mistakes and how to avoid them

I hope this article will serve as a refresfer for the more savvy readers out there and a way to share techniques, but also as a learning tool for anyone just starting out. Leave your comments and let me know what you think!

What are Loss Ratios?

Loss Ratios are a means for insurers, underwriting agents and brokers alike to assess the profitability of their businesses, an insurance policy or even a relationship with a partner company. A Loss Ratio is a single number that can be used to identify performance: the lower the number, the better the performance.

Why are Loss Ratios so important?

Without a quick and simple way of comparing the profitability of different accounts, no insurance operation has much hope of success. Critically we must determine the ratio between income and outgoings, which in insurance terms means Premiums vs Claims.

Calculating Loss Ratios

Loss Ratio is the ratio of total losses paid out in claims plus adjustment expenses divided by the total earned premiums.[1]

So for example, if for one of your insurance products you pay out £70 in claims for every £100 you collect in premiums, then the loss ratio for your product is 70%.

Remember: the total losses+adjustment expenses and total earned premiums can be tied down to a specific area, you can generate a Loss Ratio for just about anything. To make advanced Loss Ratios work however, you will need to make that process quick and easy by having access to accurate data at all times, the tools to help manage that data and something to automate the calculations.

How the experts make CLRs work tor them

The key to making loss ratios work for you lies in having the agility to react to them in very specific ways and according to rules outlined by your best underwriters, without having to involve your most senior staff on every single case.

For instance, it might be prudent on a scheme with buildings cover to up significantly the rate charged for all types of cover if there has ever been a fire claim but instead only to tweak a specific rate if the claim were for roofing damage.

Or perhaps you might up the commission offered to sub-brokers whose Loss Ratio continues not to exceed 50% on all accounts, and adjust that commission proportionate to the average Loss Ratio.

The number of ways in which insurance firms can, should and do react to Loss Ratios at a general and a specific level are extremely numerous, since at the heart of good insurance business is the mitigation of risk at all times.

Common mistakes and how to avoid them

a. Don’t calculate loss ratios manually

You can’t calculate loss ratios for specific areas of cover or policy sections manually without significant human resource, which will not only make mistakes, but in costs will quickly outweight the value of loss ratio analysis in the first place.

b. Don’t imagine that specific Loss Ratios don’t matter

If you work in insurance, Loss Ratios are everything. If you don’t react to them as well as possible, not only will they continue to rise(!) but someone else responding swiftly will dominate the market.

c. Don’t leave junior staff in the dark about loss ratios

All of your staff should understand what makes one account a great performer for you and another one poor, and how and why rates, fees or commissions are tweaked. Often the junior staff are your front line troops, and will be the first to spot trends and suggest new ways to mitigate risk.


This has been a very brief look at Loss Ratios and how they are often neglected and misused (for no good reason), despite being perhaps the single most important statistic facing any single area within an insurance organisation.

Would you like your insurance software to calculate claims loss ratios for you automatically?

Take a look at the latest and greatest insurance software.


1. Harvey Rubin, Dictionary of Insurance Terms, 4th Ed. Baron’s Educational Series, 2000

Need to calculate the Claims Loss Ratio? Use our free to use and access, underwriting claims ratios calculator. If you need help using the calculator please see our brief manual for the underwriting claims ratios calculator here.


  1. Great article. Very thorough. The common mistakes section is particularly useful.

    Do you plan to continue along these lines for other common insurance calculations like Combined ratio, Expense ratio, Earned premium etc.



    1. Thanks for your comment Tom. Yes exactly, this article is designed to be the first in an ongoing how-to series dealing with some of the top industry algorithms and terms. Thanks for those ideas, we may just do those next!

      If there are any other topics readers would like us to create articles for, don’t forget to let us know.

      Best wishes,


  2. I was just wondering what is considered an acceptable value for a claims loss ratio? I have read a number of different figures based on different sectors but is there a general figure that strikes a good balance?

    1. Thanks for your comment Lynda, it’s a good question. The answer all depends on the circumstances.

      By combining an insurer’s Loss Ratio with their other expenses (Expense Ratio) we get a Combined Ratio. By looking at this ratio you can get an idea of how profitable the operation is generally, and obviously the key for an insurer is that it is making a profit that the shareholders are comfortable with.

      It’s a little more complicated than this, since insurers generate great profit from investments made with the monies they hold in reserve, so the combined ratio is not a direct indicator of overall profitability. For instance, if you look at the Life insurance sector, the loss ratio is generally over 100%, say around 110%, but this doesn’t mean the life sector is not viable, just good value for money! The combined ratio for life insurance is even worse. The combined ratio across all sectors is on average over 100%, which tells you just how important investments are to insurers.

      Other sectors like Payment Protection have loss ratios as low as 20% or even lower. Car insurance is around 80%, Travel at 65%, and Home insurance 55%. There is no doubt that any figures you look at should be taken in the context of the industry as a whole and the cost of doing business in that sector. Feel free to post any examples you have and I’ll give you my thoughts on them.

      Best wishes,


    1. Hi Ayser,

      Many thanks for your question.

      The answer is the Technical Rate*: in this case Loss Ratio is given as a percentage of the premium retained by the underwriter/insurer, rather than a percentage of the Selling Rate* (which would include Commissions).

      Many organisations use differing loss ratio calculations depending on the circumstances, but broadly speaking:

      If you are an Insurer:

      Loss Ratio = Claims Paid + Adjustment Expenses ÷ Earned Premium – Commissions Paid – Tax

      Often an Insurer will also factor in a further deduction for Reinsurance Costs, calculating a figure known as Net Net Premium (Earned Premium – Commissions Paid – Reinsurance Premiums).

      If you are a Broker:

      Loss Ratio = Claims Paid ÷ Earned Premium – Tax

      I hope this answers your question, let me know if you’d like any additional information.

      Best wishes,


      *Readers should note that there are a number of alternative names for Technical and Selling rates, for example:

      Selling Rate:
      – Gross Rate

      Technical Rate:
      – Net Rate
      – Risk Rate
      – Underwriting Rate

    1. I think what they must be referring to is ‘In-Force Loss Ratio’.

      A policy is in force from the time of inception until the time of expiry (unless cancelled prior to that).

      Sometimes claims might be made after the policy has been cancelled or expired, particularly if they relate to events that occurred during such time as the policy was ‘in-force’.

      You can therefore have a distinction between in-force and standard loss ratios, which are as follows:

      Normal Loss Ratio = Claims Paid (at any time) ÷ Earned Premium – Tax

      In-Force Loss Ratio = Claims Paid (during such time as the relevant policy was In Force) ÷ Earned Premium – Tax

      Obviously you still need to take into account the differences between broker and insurer loss ratios (see my reply above to Ayser) but you get the basic idea.

      Let me know if this helps you, I’d be interested to know what time of insurance these ratios pertain to also.

  3. Hi Adam,
    I m working in a joint stock company we are as insured want to know the loss ratio from our medical insurance company, how to approach and what technical points to be use for asking them for above said.


    1. Hi Majid,

      Assuming you’re on good terms with these guys I don’t think you have much to worry about.

      Just ask for the loss ratio(s) you are interested in and importantly the data and formula they used to calculate them.

      Providing they give you all the information you will be able to see for yourself whether their way of generating loss ratios is meaningful and useful in the context of your business and if not, you can create your own reports from the data, potentially using different formulae to those they provide.

      Best wishes,


  4. Hi,
    how shall be handled the claims reported, and confirmed but not paid yet in the month of confirmation. Shall they enter into the calculation only when really paid?



  5. Do some insurers include the “loss adjustment expense” in the “insurance claims” figure?

    Also, is the net change in the outstanding loss reserve included in the numerator of the loss ratio calculation?


  6. Dear Adam,
    In simple words, could you please explain how to calculate a reasonable renewal premium for an auto insurance account with a LR of 130% bearing in mind the expense ratio is 28%. As I know the normal way of calculation is to divide the total incurred losses by 72% (in this example) – but then the renewal premium is going to be too high, especially if its a big LR – so is it not reasonable to calculate on an assumption that the policy will be renewed for a further 3 years minimum and the losses could be compensated in the coming 3 years rather than making up the losses in one year ? Your expert opinion is requested.


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