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,

Adam

Thanks,
Majid

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.

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,

Adam

*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

Regards,
Ayser

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,

Adam

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

Best wishes,

Adam

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

Thanks,

Tom