Loss ratio rating

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Category: Pricing & rating · Reviewed by Mark Fox, Broker · Renewals · Last reviewed

Loss ratio rating sets the premium for the renewal period as a function of the loss ratio observed in prior periods. It is a credibility-style adjustment to the current premium based on the experience-vs-expectation ratio.

Formula

Renewal premium = Expiring premium × (Actual LR / Target LR) × Adjustment factors

The adjustment factors typically include:

• Trend (inflation in claims cost).
• Change in exposure base.
• Change in rating year for long-tail lines.
• Programme structure changes (deductible, limits).

When used

• Proportional reinsurance treaty renewals.
• Large account commercial portfolios where individual claims data is sparse but aggregate loss ratio is credible.
• Profit-commission negotiation in quota-share treaties.

Limitations

• Single-year LR can be highly volatile for high-severity, low-frequency portfolios.
• Multi-year averaging is preferable but requires careful adjustment for cycle effects.
• Reserve uncertainty in immature years is amplified.

References

• IFoA. Pricing guides.
• Swiss Re. Non-proportional reinsurance pricing.

Cross-references

• Burning cost rating
• Quota share pricing

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