The percentage of incurred losses to insurance premiums received. In other words, the dollars paid out to take care of accidents divided by the payments received from the insured.
Example:
Agent 1 sells 5 million dollars of auto insurance per year. His insureds (customers) have losses (accidents) that cost the company after all expenses 90% of that 5 million. This is referred to a 90% loss ratio. The company would earn 1 million profit from this agent’s sales.
Agent 2 sells 2.5 million dollars of auto insurance per year. His insureds (customers) have losses (accidents) that cost the company after all expenses of 60% of that 2.5 million. This is referred to a 60% loss ratio. The company would earn 1 million profit from this agent’s sales.
Agent 3 sells 2.million dollars of auto insurance per year. His insureds (customers) have losses (accidents) that cost the company after all expenses including the agent’s commissions of 10 percent. This is referred to a 10% loss ratio. The company would earn 1.8 million profit from this agent’s sales.
Praying for the safety of insureds as well as charging the correct premium, in other words, not cheating the company, leads to lower loss ratios and greater rewards for the both the company and the agent. It also leads to a lower likelihood that the company will need to increase premiums due to high losses.
