Why it matters at renewal
The loss ratio is usually the first number a carrier points to. Whether it uses paid or incurred claims, and how much IBNR is included, can move it by several points.
Worked example
A group paying $1,500,000 in annual premium.
| Measure | Claims | Loss ratio |
|---|---|---|
| Paid claims only | $1,140,000 | 76% |
| Plus IBNR estimate ($135,000) | $1,275,000 | 85% |
With incurred claims, this group is right at an 85% target. As a rough guide for a group large enough to be rated on its own claims, the renewal is the current premium × (loss ratio ÷ target) × one year of trend. At 8% trend:
| Incurred loss ratio | Renewal |
|---|---|
| 80% (below target) | +1.6% ($1,524,706) |
| 85% (on target) | +8.0% ($1,620,000) |
| 90% (above target) | +14.4% ($1,715,294) |
Read the transcript
Your loss ratio is seventy-six percent. Or is it ninety? Same group, same year. And both numbers can be right.
A loss ratio compares what's paid out in claims to what's paid in as premium. Claims divided by premium. Simple, until you ask which claims, and which premium.
Take a group that paid one and a half million dollars in premium. The carrier reports one point one four million in paid claims. That's seventy-six percent.
First, one member had a two hundred five thousand dollar claim. Above the hundred seventy-five thousand dollar pooling point, thirty thousand was set aside. Add it back, and it's seventy-eight.
Next, timing. Those are paid claims. Care that happened this year but isn't billed yet adds a hundred thirty-five thousand. Count incurred claims, and it's eighty-seven.
Last, the premium. Fifty thousand dollars of it went to taxes and fees, not care. Take that out, and you're at ninety percent.
Neither number is wrong. They answer different questions. So when you see a loss ratio, ask three things. Pooled or not? Paid or incurred? And what's counted as premium? Find more at actuariallysound dot com.
Common misunderstandings
Questions to ask your carrier or broker
- Is this paid or incurred, and how much IBNR is included?
- What target loss ratio did you use?
- Were large claims pooled out, and above what level?