Guide: loss ratio
Loss ratio from loss runs: the formula, the premium you need and what underwriters look at
A loss ratio is incurred losses divided by premium for the same period. Loss runs supply the losses but usually not the premium, so premium comes from your own policy records. State whether incurred includes expense, because markets measure the ratio in different ways.
General information, not advice. This is not insurance, legal or financial advice. Requirements differ by carrier, state and market; follow the instructions of the market you are approaching.
The formula
Where each number comes from
Loss ratio equals incurred losses divided by premium, shown as a percentage. The numerator comes from the loss runs as of their valuation date, on a stated basis (see paid, reserved and incurred). The premium comes from your records. Written, earned and audited premium can differ, mainly on auditable lines such as workers' compensation and general liability, so say which you used.
What underwriters look at
- The trend across years, not only the total.
- Claim count and the largest claim, which separate frequency from severity.
- How much of incurred is open reserve.
- Any change in exposure, such as payroll, revenue or vehicles.
- The largest losses, which a large loss summary puts on one page. Some markets also look at the ratio with large losses capped or removed.
Steps
How to work out a loss ratio
The arithmetic is simple. The care goes into the basis.
- Fix the incurred basisDecide whether incurred includes expense, and use the same basis for every carrier and year.
- Take incurred by policy yearUse a schedule whose year totals tie to each carrier's printed totals, and note the valuation date.
- Get premium for the same periodsPull it from the policy and any audit, not from memory. Note whether it is written, earned or audited.
- Divide year by year, then once for the totalFor the total, add incurred and premium across the years and divide once. Do not average the yearly percentages, which gives a small year the weight of a large one.
- Put context beside the ratioAdd claim counts, open reserves, the largest claims and any change in exposure.
Worked example
Four years, one bad year
Illustrative figures that belong to no real account.
| Policy year | Earned premium | Incurred | Loss ratio |
|---|---|---|---|
| 2022-23 | $120,000 | $54,000 | 45.0% |
| 2023-24 | $126,000 | $138,600 | 110.0% |
| 2024-25 | $131,000 | $39,300 | 30.0% |
| 2025-26 | $136,000 | $68,000 | 50.0% |
| Four years | $513,000 | $299,900 | 58.5% |
One year at 110.0% lifts the four-year ratio to 58.5%. The other three years together run at 41.7%. That is why many underwriters read year by year and ask what happened in the bad one.
Pitfalls
What goes wrong
- Premium from the wrong period. A full-year premium set against part of a year of losses, or the reverse, distorts the ratio.
- Mixed incurred bases. One carrier's figure includes expense and another's does not.
- A numerator that does not tie. If the year totals differ from the carrier's printed totals, the ratio inherits the error.
- One threshold taken as universal. No single ratio is acceptable everywhere. Leave the judgment of what is good to the underwriter.
- Open reserves ignored. A ratio built on large open reserves can move at the next valuation. Show the open share.
- A percentage with no dollars. On a small account one claim can move the ratio a long way, so show incurred and premium beside it.
The tool
How LossRun Pro helps
LossRun Pro supplies the numerator: incurred by policy year, tied to each carrier's printed totals, with open and reserve amounts beside it. It does not hold premium or calculate a loss ratio. The free loss run summary template has a premium column and works out the ratio when you enter premium. Its incurred adds paid loss, paid expense and reserve, so its ratio includes expense. Build the schedule on the loss run to Excel page. Free: 1 file per day, up to 10 pages, no account. Files over 10 pages are converted up to page 10 on the free allowance; a page code converts the whole file, up to 150 pages. See pricing.
FAQ
Questions about loss ratios
What is a good loss ratio?
There is no single answer. What an underwriter accepts depends on the line, the class, the size of the account and the market's own pricing and expenses. Show the figures and the context, and leave the judgment to the market.
Do loss runs show premium?
Most do not, and a few do. Take premium from the policy, the endorsements and any final audit, and say which you used.
Should the numerator include allocated expense?
Either can be right, so state the basis and keep it consistent. Some markets measure loss only and some loss plus allocated expense. If the submission instructions are silent, ask.
What is the difference between written and earned premium?
Written premium is the full premium charged for a term. Earned premium is the part that belongs to the time that has passed. For an expired term the two are usually close, apart from audit changes.
How do I handle the current policy term?
Its premium is only partly earned and its claims are still being reported. Many brokers show it on its own line, using premium earned to the valuation date, and keep it out of the multi-year total unless the market asks for it.
What is a loss rate, and when is it used?
A loss rate is incurred per unit of exposure, such as per $100 of payroll or per vehicle. It helps when exposure changed during the period, because a ratio can look steady while the business doubled. See commercial auto loss runs for fleet-based comparisons.