Loss Ratio (Claims Ratio)

The loss ratio (also called the claims ratio, or in Indian disclosures the incurred claims ratio) is claims incurred divided by net earned premium. "Incurred" is the important word: it includes not just claims paid in the period but the change in reserves for claims that have happened and are still to be settled, including IBNR. It is almost always the largest cost line an insurer has, and the cleanest read on how well it underwrites.

Think of premium as the insurer's revenue and claims as its cost of goods sold. The loss ratio is the share of revenue eaten by the product itself — paying for the accidents, hospitalisations, and fires the insurer promised to cover. A low, stable loss ratio says the book is well selected and well priced. A high or lurching one says the opposite, and it usually points backward: today's bad loss ratio is often the delayed bill for loose underwriting or inadequate pricing one or two years ago. Because it is both the biggest number and the most revealing, it is where anyone reading a general insurer should look first inside the combined ratio.

The insurer earns ₹100 crore of net earned premium. Over the year, claims incurred come to:

Claims component	Amount
Claims paid during the year	₹62 cr
Change in outstanding claim reserves	₹5 cr
Change in IBNR (late-reported claims)	₹3 cr
Claims incurred	₹70 cr

Loss ratio = ₹70 cr ÷ ₹100 cr = 70% (illustrative). Seventy paise of every premium rupee went back out as claims. That leaves only thirty paise to pay commissions, salaries, rent, and technology — and to earn a profit. You can already feel the squeeze: if expenses eat 35 paise (a 35% expense ratio), the insurer has spent 105 paise to earn 100. And notice the reserving line — under-book that ₹3 crore of IBNR and the loss ratio would flatter to 67% today, only to snap back when the late claims surface. The loss ratio is honest only if the reserves behind it are.

The loss ratio is the larger half of the combined ratio; add the expense ratio to it and you have the full underwriting verdict. Its honesty depends on reserving, which is why IBNR sits directly upstream of it. And one line pushes it up by design: motor third-party cover is priced by IRDAI, historically below its own claims cost. So every general insurer carries a structurally loss-making chunk it is obliged to write. When a loss ratio deteriorates, the questions are always the same: was it the underwriting, the pricing, the reserving, or the mandated lines?