Loss Ratio & Its Impact on Renewal Premiums

What the ratio measures

An insurer collects premium and pays claims. The incurred claims ratio, often called the loss ratio, compares the two: net incurred claims divided by net earned premium, shown as a percentage. It tells how many rupees of claims arose for every ₹100 of premium earned in the period.

Incurred claims are not the same as claims paid. Some claims that belong to the period are still unpaid at its end, and some payments in the period relate to earlier claims. So incurred claims are claims paid plus the change in outstanding claims provisions, that is, closing provisions minus opening provisions. It is the change that is added, not the whole outstanding reserve.

Reading the number

A ratio of 115% means incurred claims were ₹115 for every ₹100 of net earned premium: claims alone exceeded premium by 15%. This is before any expenses.

Adding the expense ratio, which covers commission and operating costs, gives the combined ratio. A combined ratio above 100% means claims and expenses together exceed premium. That is an underwriting loss, before any investment income is counted.

What follows from it

Claims experience is one input when an insurer reviews its premiums. There is a brake for older policyholders: for people aged 60 and above, the premium on an individual indemnity policy cannot rise by more than 10% in a year without the insurer consulting IRDAI.

Sustained underwriting losses also erode the surplus that supports solvency. IRDAI's solvency regulations specify a control level of 150% for the solvency ratio, that is, 1.5. An insurer falling below the control level has to file a plan with IRDAI.

An insurer may also withdraw a product. Existing customers then get a one-time option to renew if the renewal falls due within 90 days of the withdrawal, or may migrate to another product of the insurer with their credits carried over. Multi-year policies continue for their full term.

Rules at a glance

Key points

• Loss ratio (incurred claims ratio) = net incurred claims ÷ net earned premium.
• Incurred claims = claims paid + (closing − opening outstanding claims provisions).
• A ratio above 100% means claims alone exceed earned premium, before expenses.
• Combined ratio = loss ratio + expense ratio; above 100% is an underwriting loss.
• Premium on individual indemnity policies of those aged 60 and above cannot rise more than 10% a year without consulting IRDAI.
• IRDAI's control level for the solvency ratio is 150%.
• On product withdrawal, policyholders may renew once (if due within 90 days) or migrate with credits.

Common misunderstandings

• Incurred claims are not claims paid plus the whole outstanding reserve: only the change in the provision, closing minus opening, is added.
• A loss ratio below 100% does not by itself mean an underwriting profit: expenses have to be added to reach the combined ratio.
• The loss ratio is an insurer-level or portfolio-level measure, not a statement about any one policyholder's claims: renewal cannot be refused because of a person's past claims.
• The 150% figure is a solvency ratio, not a claims ratio: the two measure different things.

Questions people ask