Loss Ratio – Don’t be a Loser !
Loss ratio is the most important indicator of whether an insurance program (or in our world – a warranty program) is a success or a failure. Loss ratio is the difference between the ratios of premiums paid to an insurance company and the claims settled by the company.
The losses are added to adjustment (administration) expenses and then divided by total earned premiums.
So if a company pays $80 in claims for every $150 in collected premiums, then the company has a loss ratio of 53%.
The loss ratio will reflect if companies are collecting premiums higher than the amount paid in claims or if it is not collecting enough premiums to cover claims.
Companies that have high loss claims are likely headed for financial disaster if they don’t take steps to either:
- increase premiums or
- reduce claims frequency(%) and/or severity ($).
So, if you don’t want to be a loser, make sure always know your loss ratio!