How is the loss ratio calculated?

How is the loss ratio calculated?

• A. Incurred losses divided by earned premiums.
• B. Earned premiums divided by incurred losses.
• C. Incurred losses divided by written premiums.
• D. Written premiums divided by incurred losses.

Answer: (A)

The loss ratio shows how much of the earned premium is consumed by claims and related costs during a period. Incurred losses include claims that have been paid or reserved for, while earned premiums are the portion of written premiums that applies to the time period of coverage. The standard formula is incurred losses divided by earned premiums. For example, if incurred losses are 60,000 and earned premiums are 100,000, the loss ratio is 60%, meaning 60% of the premium income is used to cover claims. Using written premiums (rather than earned) would distort the measure because it includes premium not yet earned, and inverting the ratio would not reflect the true relationship between losses and the revenue actually earned.

The loss ratio shows how much of the earned premium is consumed by claims and related costs during a period. Incurred losses include claims that have been paid or reserved for, while earned premiums are the portion of written premiums that applies to the time period of coverage. The standard formula is incurred losses divided by earned premiums. For example, if incurred losses are 60,000 and earned premiums are 100,000, the loss ratio is 60%, meaning 60% of the premium income is used to cover claims. Using written premiums (rather than earned) would distort the measure because it includes premium not yet earned, and inverting the ratio would not reflect the true relationship between losses and the revenue actually earned.