How is the loss ratio of an insurance company calculated?

The loss ratio is a critical metric used to assess the financial health of an insurance company. It is calculated by dividing the total losses incurred by the amount of premiums collected during a specific period. This formula helps insurance companies determine how efficiently they are managing their underwriting activities. A lower loss ratio indicates better profitability, as it means the company is retaining a higher percentage of premiums relative to the claims it pays out. In contrast, a high loss ratio could signal potential issues with underwriting practices or pricing strategies.

The option regarding averaging the claims made does not provide an accurate measure of financial performance related to premiums, while comparing current claims against past losses does not specifically quantify the relationship between losses and premiums. Assessing administrative costs is unrelated to the loss ratio, which focuses specifically on claims and premiums rather than operational expenses. Therefore, the method of dividing losses by the premiums collected is the correct approach to calculating the loss ratio in the insurance industry.