[[Actuarial Notes Wiki|Wiki]] / [[Exam 5 (CAS)]] / **Loss Ratio Analysis** ## Definition ==Loss Ratio Analysis== is the examination of the ratio of incurred losses to earned premium over time to assess trends, profitability, and reserve adequacy. ## Formula ``` Loss Ratio = (Incurred Losses + LAE) / Earned Premium Where: Incurred = Paid + Case Reserves + IBNR ``` ## Uses ### Reserve Adequacy ``` Compare loss ratios by: - Accident year - Development age - Calendar year - Line of business Increasing loss ratios may indicate: - Inadequate case reserves - Emerging adverse development - Rate inadequacy ``` ### Profitability Assessment ``` Target Loss Ratio = 1 - Expense Ratio - Profit Example: Expenses: 30% Profit: 5% Target: 65% Actual: 72% Result: Unprofitable ``` ## Diagnostic Patterns ### By Accident Year ``` Consistent loss ratios → Stable pricing Increasing loss ratios → Rate inadequacy or reserve deficiency Decreasing loss ratios → Rate strengthening or reserve redundancy ``` ### By Development Age ``` Stable ratios as claims develop → Adequate reserving Increasing ratios → Case inadequacy Decreasing ratios → Conservative reserving ``` ## Related Concepts - [[Loss Ratio Method#Definition]] - [[Reserve Adequacy#Definition]] - [[Pure Premium Analysis#Definition]] ## References - Werner & Modlin, Chapter 4 - Friedland, Chapter 11