What this calculator measures

This tool computes an insurer’s underwriting loss ratio the share of premium income that is consumed by claims and the direct costs of handling those claims. In practical terms it answers: for every dollar collected in premiums, how much goes out to settle claims and adjust them?

The formula

Loss ratio = (Claims paid + Loss adjustment expenses) ÷ Total premiums earned
Expressed as a percentage, the result shows the proportion of premium revenue used to cover claims and related processing costs. This is the exact computation the calculator performs.

How to use the loss ratio calculator

1. Total premiums earned Enter the total premiums the company recognized as revenue during the period. Use earned premiums, not written premiums.
2. Insurance claims paid Sum of all claim payments actually disbursed in that period (not reserves or outstanding estimates).
3. Loss adjustment expenses (LAE) Costs tied to investigating, defending, and settling claims (including third-party adjusters and legal fees).
4. Click Calculate (or press Enter). The calculator returns the loss ratio as a percentage and gives an interpretation of whether that level implies profit, break-even or underwriting loss.

Interpreting the number

• Greater than 100% – Claims + LAE exceed premium income; underwriting activities are running at a loss. This implies the insurer paid out more than it collected for the period.
• Exactly 100% – Premiums equal claims and adjustment costs; the underwriting result is break-even.
• Less than 100% – Premiums cover claims and adjustment expenses; underwriting is profitable on a pure claims basis.

Typical benchmarks and what they mean

There is no universal “good” number acceptable levels depend on product line (life, property & casualty, motor, etc.) and the insurer’s strategy. As a rough industry yardstick, many insurers aim for mid-range loss ratios; figures around 40%–60% are frequently considered average for broad lines, but your acceptable threshold will shift based on whether the business writes high-frequency/low-severity or low-frequency/high-severity risks. Use benchmarks cautiously and compare within the same product class.

Why a loss ratio can be high or low

Common drivers for a high loss ratio:

• Underpriced policies or inadequate premium increases for rising risk.
• Unexpected event clusters or catastrophe losses.
• Poor underwriting that misclassifies risk or accepts adverse selection.
• Operational inefficiencies that increase loss adjustment expenses.

Common drivers for a low loss ratio:

• Conservative pricing or selective underwriting.
• Favorable loss experience (fewer claims than expected).
• Strong fraud controls and efficient claims handling that lower LAE.

Practical uses and limits of the metric

• What it’s good for: quick monitoring of underwriting performance, comparing product lines, spotting sudden deterioration in claims trends, and informing pricing reviews.
• What it’s not: a standalone measure of total profitability. The loss ratio excludes operating overhead, acquisition costs, investment income, taxes and reinsurance effects. For a complete view pair it with expense ratios, combined ratio, and investment returns. Also, be careful when mixing earned vs written premium or paid claims vs incurred losses, consistency matters.

How to act on an unfavorable result

If the ratio is higher than your target:

• Revisit pricing and risk segmentation.
• Tighten underwriting criteria or improve screening.
• Enhance claims management processes to reduce LAE.
• Consider reinsurance or other transfer mechanisms for big exposures.
  If the ratio is lower than expected, check whether it reflects sustainable improvement, aggressive reserving, or simply a temporary lull in claims.

Example

Suppose a book of business had $10,000,000 in earned premiums, paid $3,500,000 in claims and $1,800,000 in loss adjustment expenses.
Loss ratio = (3,500,000 + 1,800,000) ÷ 10,000,000 = 0.53 → 53%.
This indicates premiums comfortably cover claim payouts and adjustment costs for the period.

FAQs

Q1. Can I use this for non-insurance businesses?

No, this indicator was designed to evaluate insurance underwriting performance. Its components (premiums, claims, LAE) are insurance-specific and do not translate to general commercial accounting.

Q2. Can loss ratio be negative?

No. Because premiums, claims and LAE are non-negative values, the calculated ratio cannot be negative.

Q3. Should I use paid claims or incurred claims?

Consistency is key. This calculator uses paid claims plus LAE. If your reporting or benchmarking uses incurred losses, note the difference incurred figures include changes in reserves and can produce different ratios.

Sources: OmniCalculator, Swoop Funding, Calculator Academy, Competitive Intelligence Alliance, Insurance Training Center.