When it comes to your health, everyone understands the importance of “knowing your numbers.” However, if you are responsible for buying property and casualty insurance for your company, it’s just as important to “know your numbers” in terms of your loss ratio.
What is a Loss Ratio?
Your loss ratio is a simple calculation: Take your TOTAL LOSS DOLLARS (Paid and Reserved) / AMOUNT OF PREMIUM YOU PAY
To understand your loss ratio, think of insurance at its core as nothing more than a form of legalized gambling. The underwriter and insurance company are essentially making a bet that the premium they collect will be more than the losses or claims you incur throughout the policy period. This being said, knowing your loss ratio is the best way to become an informed purchaser of insurance and the best way to predict and control future costs.
Why is this important?
Knowing your loss ratio allows you to do several things.
1. Budget Future Renewal Premiums
- A high loss ratio typically means increased premiums
- A low loss ratio typically means a more favorable renewal
2. Determine Your Negotiation Leverage
- The lower your loss ratio, the more negotiating clout you have
3. Determine Your Future Renewal Strategy
- This helps you determine if your pre-renewal offering or indication from your incumbent carrier is in line with the market
- If the offering is not in line, that’s when we shop to see if there’s a better solution out there
4. Identify Risk Management / Safety Initiatives
- By looking at loss ratios by a line of coverage, we can spot trends and devote the appropriate resources to manage those losses
5. Tell Your Story to Underwriters
- Underwriters are conservative by nature. The more information we can arm them with, including how profitable you’ve been over the years, the more aggressive they can get with their premium
- A bad loss ratio doesn’t always mean that underwriters will give you a high premium. If the loss ratio is driven high by one large loss or fluke incident, that’s when we can use these numbers to your advantage
In summary, make sure to know your numbers and know your loss ratio. If you are interested in learning more about this topic, check out our next video, “What is a Good or Bad Loss Ratio,” or contact Tony Hopkins at Tony.Hopkins@thehortongroup.com or 414-736-7119.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.