Loss Ratio

Loss ratio is the percentage of premium dollars that an insurance carrier pays out in claims, calculated by dividing total claims paid by total premiums collected.

Think of it as the insurance company's report card on how much money they're spending versus how much they're taking in from your clients.

Why does this matter?

Loss ratios directly impact your bonus and contingent commission opportunities. Insurance carriers use loss ratios to determine profitability, and many agent compensation plans include substantial bonuses when you maintain favorable loss ratios on your book of business.

Poor loss ratios signal that you're either writing bad risks or not properly underwriting your clients, which can lead to reduced commissions and strained carrier relationships.

How it works:

Carriers track every claim paid against policies you've written and divide that total by the premiums collected on those same policies. A 60% loss ratio means the carrier paid out $60 in claims for every $100 in premium collected. Lower loss ratios indicate more profitable business, while higher ratios suggest the carrier is losing money on your book.

You'll encounter loss ratio tracking most commonly in property and casualty insurance, where carriers can easily track claims against specific agents' books of business. Life insurance uses different profitability metrics since claims are less frequent but much larger.

The biggest mistake agents make is writing policies for any client who can pay the premium, without considering their risk profile or claims history, leading to loss ratios that destroy their profitability bonuses and damage their carrier relationships.