What is a "loss ratio"?

A "loss ratio" is defined as the ratio of claims paid to the premiums earned by an insurance company, and it serves as an important indicator of profitability for the insurer. This metric is calculated by dividing the total amount of claims paid during a specific period by the total premiums collected in the same period. A lower loss ratio indicates that the insurer is paying out less in claims relative to what it earns from premiums, suggesting better profitability. Conversely, a higher loss ratio could indicate potential issues, such as underwriting problems or insufficient premium rates relative to the risks being insured. Thus, understanding the loss ratio allows insurers and stakeholders to gauge whether a company is effectively managing its risks and earning a profit.

The other choices do not accurately describe the loss ratio, as they pertain to different aspects of insurance operations and financial analysis. The ratio of expenses to premiums relates to overall operational efficiency, the percentage of claims denied reflects claims processing and underwriting practices, and the comparison of current premiums to previous years speaks to market trends rather than profitability assessment. These distinctions highlight why the loss ratio specifically focuses on the relationship between claims payouts and premium income.