How does loss ratio work?

Answer:

Your "loss ratio" is the ratio of the total value of all losses divided by your premiums. So the loss ratio is the insurance company’s measure of how much of your premium they are going to be giving back in the form of claims payments.

The insurance company will set a target loss ratio (ie. 40%). If your losses cause your loss ratio to exceed that target, your premium will likely be increased to bring it back in line.

Conversely, if your loss ratio is below that target, the insurance company may apply credits that decrease the cost of the policy.

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