What does the term "loss ratio" indicate?

The term "loss ratio" is a critical measure in the insurance industry that effectively reflects an insurer's financial health and performance. It specifically indicates the ratio of the insurer's claims paid out to the total premiums collected within a specified period. This ratio is crucial because it helps assess how much of the premium income is being utilized to cover claims.

A lower loss ratio suggests that the insurer is retaining more of the premium income after paying claims, which can indicate profitability. Conversely, a high loss ratio may suggest that the insurer is paying out a significant portion of its premiums in claims, which can put financial pressure on the insurance company. Understanding the loss ratio is essential for both insurers and regulators to evaluate the sustainability and efficiency of an insurance provider’s operations.