What does "loss ratio" indicate in insurance terms?

• A. The total premiums collected by an insurer
• B. The average payout amount for claims
• C. The proportion of claims paid out versus premiums collected
• D. The overall profitability of the insurance market

Answer: (C)

The term "loss ratio" is a critical metric in the insurance industry that reflects the financial efficiency of an insurer. It is defined as the ratio of claims paid out to the premiums collected. Specifically, it is calculated by taking the total amount of claims an insurer has paid and dividing it by the total premiums the insurer has received. A higher loss ratio indicates that a larger proportion of premiums is being used to pay claims, which can imply lower profitability if the ratio is too high.

Understanding the loss ratio is essential for insurers to assess their risk management and pricing strategies, allowing them to adjust premiums to ensure long-term viability. Thus, it directly relates to the financial assessment of an insurance provider, distinguishing it from other choices that refer to different aspects of the insurance business, such as total premiums collected or market profitability.