What does a high loss ratio indicate for an insurance company?

A high loss ratio indicates potential financial difficulties for an insurance company. The loss ratio is calculated by dividing the total losses paid out in claims by the total earned premiums. A high ratio suggests that a significant portion of the insurer's premiums is being consumed by claims, which can signal that the company is not generating enough premium income relative to its losses.

When the loss ratio is elevated, it may imply that the insurance company is facing challenges in underwriting profitable coverage or managing risk effectively. This situation can lead to concerns about the company's ability to remain solvent, pay out future claims, and sustain operations over the long term. Insurers aim for a balanced loss ratio to ensure ongoing financial health, so a persistently high loss ratio often raises red flags for stakeholders regarding the insurer's economic viability.