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The loss ratio shows how much of an insurer's premium goes to claims, while the expense ratio shows how much goes to the cost of running the business. Add the two together and you get the combined ratio, the quickest read on whether a carrier makes money from underwriting. For agents and brokers in today's competitive marketplace, knowing which ratio is moving helps explain rate changes, appetite shifts and commission conversations.
Both ratios use premium as the denominator, but they diagnose different problems. A rising loss ratio usually points to pricing, risk selection, claims severity or weak claims management. A rising expense ratio points to the carrier's cost structure: commissions, staffing, technology, and operational overhead.
What Is the Loss Ratio?
The loss ratio compares claims costs to premium income. In property and casualty reporting, the common version is the loss and loss adjustment expense ratio: incurred losses (claims paid plus the change in loss reserves) plus claim adjustment costs for investigating, defending, and settling claims.
Loss ratio
(Losses incurred + loss adjustment expenses) ÷ earned premium × 100
The denominator counts only premium for coverage already provided. A 12-month policy written on July 1 has earned only half its premium by December 31, so calendar year results include just that half. In a hypothetical example, a commercial lines carrier that earns $50 million and incurs $35 million in losses and LAE has a 70% loss ratio.
Lines behave differently. Workers' compensation claims can stay open for years, so reserve development can change results long after the policy expires, which is why analysts often compare results by accident year. Property results can swing with catastrophe losses. For a step-by-step walkthrough, see how to calculate loss ratio.
Health insurance uses its own version. Under the Affordable Care Act, the medical loss ratio rule (often called the 80/20 rule) requires insurers to spend at least 80% of premium (85% in the large group market) on medical care and quality improvement, or pay rebates to enrollees.
What Is the Insurance Expense Ratio?
The expense ratio measures what a carrier spends to acquire, write, and service business. Typical items include:
- Acquisition costs such as agent commissions, broker commissions and marketing expenses
- Policy setup, inspections and risk assessment
- Employee wages, facility costs and general administrative expenses
- Technology costs, including system maintenance
- Premium taxes, licenses, fees and regulatory compliance
Expense ratio = underwriting expenses ÷ premium × 100
Claim-handling costs belong with losses, not here. Defense costs on a claim count as LAE, while the carrier's own corporate legal fees are an operating expense. Investment expenses are also left out because they are netted against investment income rather than underwriting results. Technology spending, including digital transformation projects, can also raise the expense ratio before any savings appear.
Which premium goes on the bottom depends on the report. Many industry reports use the statutory version.
Statutory version
Divides by written premium
This is because commissions are paid when a policy is written.
GAAP accounting statements
Usually divide by net premiums earned
This matches expenses to the coverage period.
Statutory accounting and GAAP figures for one carrier can differ, so compare ratios on the same basis. In a hypothetical example, a regional carrier with $100 million in premium volume and $30 million in operational costs has a 30% expense ratio.
Expense Ratio vs. Loss Ratio: Key Differences
| Loss ratio | Expense ratio | |
|---|---|---|
| Measures | Claims and claim-handling costs | Cost to acquire, write, and service policies |
| Usual denominator | Premium earned | Premium written or earned, depending on basis |
| Main drivers | Pricing adequacy, weather, claim trends | Commissions, staff, technology, premium taxes |
| A rising ratio suggests | Underpriced or poorly selected business | Growth costs, lost scale or weak operational efficiency |
| Owned mainly by | Underwriting and claims | Operations, distribution and finance |
Combined ratio = loss ratio + expense ratio. A result under 100% signals underwriting profitability, while a result over 100% means underwriting losses that investment returns or capital must cover. If one carrier had a 70% loss ratio and a 30% expense ratio, its combined ratio would be 100%, break-even before investment returns.
70%
Example: loss ratio of one carrier
30%
Example: expense ratio of the same carrier
100%
Example: combined ratio, break-even before investment returns
The two ratios trade off. One carrier may accept a higher expense ratio to pay for inspections, loss control, and risk management services if that buys a lower loss ratio and a better profit margin. Another may run lean on expenses to support competitive pricing, then struggle if its loss ratio climbs.
What the Ratios Mean for Agents and Brokers
For insurance professionals, these ratios explain how insurance carriers behave. A carrier whose loss ratio is climbing in a class will often raise rates, tighten guidelines, or narrow appetite. A carrier with a high expense ratio may look for savings in commissions, servicing, or technology.
Distribution shapes the expense ratio too. Carriers and insurtech companies that sell personal lines direct to consumers swap commissions for advertising and customer acquisition spending, so compare carriers that use the same distribution channel. When a market changes rates or commissions, ask which ratio moved, in which lines, and on what accounting basis. Several years of both ratios say more about carrier performance than any single year.
Frequently Asked Questions
What is a good expense ratio for an insurance company?
There is no single good number. Expense ratios vary by line, distribution model and size, and by whether the figure uses premium written or earned. Compare a carrier with peers in the same lines and on the same basis, and watch its own trend over several years. A rising ratio on a stable book deserves a question.
Does the expense ratio include claims handling costs?
No. Costs to investigate, adjust, defend, and settle claims are loss adjustment expenses, and they sit with losses. The expense ratio covers the cost of acquiring and servicing policies, such as commissions, salaries, technology, premium taxes, and general overhead.
Why can two sources show different ratios for the same carrier?
They may use different accounting bases. Statutory figures in many industry reports divide expenses by premium written, while GAAP statements usually divide by premium earned. Whether premium is counted before or after reinsurance policies, and how policyholder dividends are treated, can also change the result, so check the definition before comparing.
How do agency commissions affect the expense ratio?
Commissions are a cost of acquiring business and are often one of the largest parts of the expense ratio for carriers that sell through agents and brokers. When a carrier needs to lower its expense ratio, it may look at commission schedules, along with staffing and technology.
Where can I find a carrier's loss and expense ratios?
Start with the carrier's statutory annual statement, available through state insurance departments and NAIC data products, and with its annual report if it is publicly traded. Rating agencies such as AM Best also publish carrier financial data and ratio analysis in their reports, which helps when judging a carrier's financial health.
Justin Goodman
Co-Founder and CEO, Total CSR
With two decades of experience in the insurance industry, Justin is the co-founder and CEO of Total CSR and the co-founder and Managing Director of Project 55. By the age of 29, Risk and Insurance Magazine recognized him as one of the nation’s top five construction insurance experts. He has also been named to Insurance Business Magazine’s Hot 100 and was most recently honored as the 2024 Insurance Journal Agent of the Year.
Through his leadership at Total CSR, Justin has trained more than 100,000 CSRs, account managers, and producers, driven by his passion for developing the next generation of insurance professionals. When not spending time with his family, he dedicates his free time to speaking at industry events and advising agency owners across the country.
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