In financial analysis, what is the function of the loss ratio?

• A. The ratio of investment income to total liabilities.
• B. The ratio of incurred losses plus adjustment expenses divided by premiums; measures underwriting profitability and risk adequacy.
• C. The ratio of net income to total assets.
• D. The ratio of premiums to claims.

Answer: (B)

The loss ratio shows how much of each premium dollar is consumed by claims and related costs. It’s calculated as incurred losses plus loss adjustment expenses divided by premiums earned. This ratio reveals underwriting profitability and risk adequacy by indicating how well pricing and policy terms cover the expected claim costs. A lower loss ratio means more premium remains to cover expenses and provide profit, while a higher ratio suggests claims and adjustments are eating up a large portion of premiums, signaling potential pricing or risk issues. Remember, the loss ratio reflects underwriting performance alone (no investment income) and is often considered alongside the expense ratio to gauge overall underwriting profitability.