Category: Underwriting practice · Reviewed by Chrissie Anderson, Client Executive · Last reviewed
Loss ratio (underwriting)
The loss ratio is incurred losses (and allocated loss adjustment expenses) divided by earned premium, expressed as a percentage. It is one of the two principal components of the combined ratio.
Formula
Loss ratio = (Incurred losses + ALAE) / Earned premium
Variants:
Calendar-year loss ratio — losses paid plus reserve movements within the reporting period, divided by earned premium in the period.
Accident-year loss ratio — losses arising from events in the accident year, divided by premium earned in respect of risks exposed during that year.
Underwriting-year loss ratio — losses from policies underwritten in the year, divided by premium written in the year (common in Lloyd’s reporting).
Interpretation
A rising calendar-year loss ratio can signal either deteriorating recent experience or adverse prior-year reserve development.
A rising accident-year loss ratio more cleanly indicates current-year deterioration.
The two should be analysed together to avoid misreading reserve releases as current-year strength.
