An insurance loss ratio is the amount of claims an insurance company has to pay to the amount of earned premiums the company collects for the year. Insurance companies want a low loss ratio. The lower the loss ratio, the more profitable the health insurance. For example, in the fourth quarter of 2008, AIG reported a loss of $62 billion. That quarter, their loss ratio was 83.05 percent. In the fourth quarter of 2007, AIG lost only $5.3 billion and had a loss ratio of 69.7 percent.
Determine the amount of claims the insurer paid during the year. For example, Firm A paid $140,000 in claims for the year. This information is found on the insurer's income statement under a heading such as "Claims" or "Medical Expenses."
Determine the amount of premiums the company collected during the year. Assume Firm A had $225,000 of revenues from their health insurance plans. This information is found on the insurer's income statement under a heading such as "Premiums" or "Revenues."
Divide the amount of claims the insurer paid by the amount of premiums collected. In our example, Firm A's loss ratio is $140,000 divided by $225,000, which equals 62.22 percent. When comparing two insurers' loss ratios an investor would want an insurer with a low loss ratio because the insurance company would be collecting more revenues and paying less expenses than the other company. Consumers, on the other hand, would want an insurer with a high loss ratio because it means the insurance company is paying out their claims instead of trying to limit their claims. According to the Minnesota Department of Commerce, loss ratios can range from 40 percent to 140 percent depending on the industry and the company.
- Minnesota Department of Commerce: Report of 2008 Loss Ratio Experience in the Individual and Small Employer Health Plan Markets for: Insurance Companies Nonprofit Health Service Plan Corporations and Health Maintenance Organizations
- Insurance Journals: AIG Reports $62B Loss for Q4, $99B for Year
- Active Media Guide: Understanding Insurance Ratios
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