What is the formula for determining a company's loss ratio?

The correct formula for determining a company's loss ratio is (Incurred losses + loss adjustment expenses) / earned premium. This calculation is crucial for assessing the financial health of an insurance company in relation to its underwriting performance.

The loss ratio measures the percentage of premium income that is paid out in claims and associated expenses. By adding incurred losses, which include both claims that have been paid out and those anticipated to be paid in the future, to loss adjustment expenses (the costs associated with investigating and settling claims), the formula provides a complete picture of the costs incurred due to claims relative to the income generated from premiums earned. This ratio is significant because a higher loss ratio indicates that a larger portion of premiums is being used to pay claims, which could suggest potential issues with underwriting practices or pricing.

In contrast, other options do not accurately represent the loss ratio. For example, calculating claims paid plus reserves in relation to total revenue does not align with the definition of loss ratio, as revenue can include various income streams beyond premiums. Similarly, net income in relation to earned premium focuses on profitability rather than the direct comparison of claims to premium income. Lastly, relating total claims to total policies and multiplying by 100 introduces a metric that assesses claim frequency rather than the financial