Expected Loss Ratio
What Does Expected Loss Ratio Mean?
An expected loss ratio helps determine how much of the premium income an insurer should allocate for future claims. This amount is not fixed; it is based on probability and actuarial forecasts aimed at predicting the number and severity of claims the insurer will need to cover.
Insuranceopedia Explains Expected Loss Ratio
The premiums charged by an insurance company are primarily based on projected future claims, along with operating expenses and profit. A portion of each premium payment is allocated to a reserve to ensure the insurer can cover claims. The expected loss ratio method is often used to estimate future claims for new insurance products that lack sufficient historical data for accurate forecasting. Once the product has been sold for some time, this method is replaced by one based on the actual number of claims filed by policyholders.
