Legal Definitions - loss ratio

Definition: Loss ratio is a term used in insurance and finance to describe the ratio between the amount of money paid in premiums or loan assets and the amount of money lost due to claims or loan defaults during a specific period of time.

Example 1: In insurance, if a company collects $1,000,000 in premiums and pays out $500,000 in claims during a year, the loss ratio would be 50% ($500,000/$1,000,000).

Example 2: In finance, if a bank has $10,000,000 in loan assets and experiences $100,000 in loan losses during a year, the loss ratio would be 1% ($100,000/$10,000,000).

These examples illustrate how loss ratio is used to measure the financial performance of insurance companies and banks. A high loss ratio indicates that a company is paying out more in claims or experiencing more loan losses than it is collecting in premiums or loan payments, which can be a sign of financial instability. A low loss ratio, on the other hand, indicates that a company is collecting more in premiums or loan payments than it is paying out in claims or losses, which can be a sign of financial strength.