What is a loss ratio in reinsurance?

A loss ratio is incurred loss divided by earned premium on a stated basis. It is a profitability measure for a year of account, a class, a treaty, or a named large risk if you have the premium. It is only as honest as the two inputs. Change the earned definition, leave out IBNR, or mix two contracts, and the ratio is theatre.

It is not rate on line. Rate on line is premium over limit. It is not combined ratio unless you have also cited expenses. This page will not publish a "good" loss-ratio band. Your clause, your corridor, your profit commission: those thresholds are in the wording.

Two cited numbers

Fictional walkthrough: ACME Construction Ltd, acme.example. On the 30 percent quota share, ACME's ceded earned premium for 2026 as-at 31 December is USD 1,200,000. Incurred on the same share and same as-at, including paid USD 620,000, case outstanding USD 160,000, and allocated IBNR USD 0 because the large-loss list treats ACME as fully reported, is USD 780,000. Loss ratio is 780,000 / 1,200,000, which is 0.65. If you add class IBNR of USD 120,000 that someone dumped onto ACME without a method, the ratio moves. Show the method or leave IBNR off the named-insured ratio.

If earned is still written USD 1,200,000 because nobody earned the policy, and the policy incepted 1 July, the denominator is too large and the ratio looks better than the year. Treaty reinsurance profit commission that uses "loss ratio on earned" will not match a spreadsheet that used written. Reinsurer operations should refuse a profit-commission invoice that cannot show the same earned cell the clause names.

Do not use TIV as a substitute for premium. Slip USD 42,000,000 versus SOV USD 47,100,000 is a schedule conflict. Dividing incurred by TIV is not a loss ratio.

Ground-up versus ceded

Quota-share loss ratio uses ceded incurred over ceded earned, or subject over subject, as the wording says. Excess-of-loss burning cost uses layer loss over a stated exposure base, which people also casually call a loss ratio. It is not the same fraction. An ACME ground-up loss of USD 8,200,000 on a USD 5,000,000 attachment produces USD 3,200,000 of layer incurred. Dividing USD 3,200,000 by USD 400,000 of layer premium is a layer ratio, not the original's ratio.

The bordereaux automation guide is how premium and claims files stay on the same year of account. A claims row with no event date cannot sit in this year's incurred. A premium row for a class the treaty excludes should not sit in earned.

What to keep visible

As-at date. Paid, outstanding, IBNR on or off. Gross or net of inwards recoveries. Currency. Contract name. If ACME is also facultative, do not drop facultative incurred into the treaty ratio because the name matched.

Development: a 0.65 ratio at 12 months is not the same estimate at 36 months for long-tail. Property ACME may be short-tail. Do not apply a casualty pattern because the workbook had one. If the triangle is missing, say the ratio is reported-to-date, not ultimate.

A fluent sentence that the book "ran at sixty-five" without the two inputs is not a loss ratio. It is a rumour.