What is the calculation used to assess the performance of an insurance company in terms of losses?

The loss ratio is a key financial metric used to assess the performance of an insurance company regarding its losses. It is calculated by dividing the total incurred losses (including claims paid and claim reserves) by the total earned premiums during a specific period. This ratio provides valuable insight into how much of the premium income is being used to pay for claims, indicating the insurer's underwriting performance.

A low loss ratio suggests that the insurer is effectively managing its risks and making a profit, while a high loss ratio may indicate that the company is facing significant claims relative to its premiums, which could point to potential financial difficulties. Thus, monitoring the loss ratio is crucial for an insurance company to ensure sustainability and profitability.