Concerning insurance, the definition of loss ratio is the following: The loss ratio insurance is the ratio of the total losses an insurance company has paid out on claims made (plus any modification costs require to do this) divided by the sum of the premiums received by the insurance company in the same period of time.
This number is really easy to estimate. Let’s say, for example, an insurance company earns $1 million in monthly premiums under 100 and spends $500 000.00 on paying customer’s claims. The loss ratio is 50% in this case. Instead, if the company would have settled $1.5 million in claims in the month, then the loss ratio insurance would be 150%.
What Loss Ratio Could Be Classified as Acceptable?
There is a loss ratio insurance in every insurance company because it is improbable that every insured that makes a claim while his or her policy is valid fails in the process, or else, insurance would not be necessary. The insurance company would not have reason to exist.
In car and property insurance industries, the usual loss ratios could be found between 40% and 60%. These numbers demonstrate that the insurance companies are being conducted suitably. They are earning more money in premiums than they are spending on paying claims, so they generate incomes for the companies and their shareholders. Loss ratio insurance tends to be high in a health insurance company, more than in other kinds of insurance companies. Health loss ratio insurance could be a number between 60% and 110% because they have to deal with different risks.
Insurance companies that constantly have high loss ratios may face problems with their finances because the premiums they earn are not enough to make up for the claim payments they are paying. They should quickly solve this situation. Otherwise, the company could be walking to bankruptcy.
Target Loss Ratio Insurance: What Is This?
There is a loss ratio insurance at which an insurance company should operate at or below if they want to achieve their income objectives. It is called target loss ratio or, occasionally, permissible balance point or expected loss ratio.
The target loss ratio is frequently calculated at a level of 1 and has the expense ratio subtracted from it. The expense ratio represents the level of expense an insurance company needs to keep its regular business processes, and it contains many eventualities and costs.
If an insurance company meets its target loss ratio, as it happens with Rodney D Young Insurance, we could say it is appropriately administrated, with a risk management plan that allows steady productivity.