Rodrigo calculates loss ratio as which of the following?

Rodrigo calculates loss ratio as which of the following?

• A. Losses divided by written premium
• B. Losses and LAE divided by earned premium
• C. Losses and LAE divided by written premium
• D. Losses divided by earned premium

Answer: (B)

Loss ratio measures how much of the earned premium is used to pay claims and related costs. It is calculated by taking the total cost of claims during the period—losses plus allocated loss adjustment expenses (LAE)—and dividing by the premium that has actually been earned in that period. Including LAE ensures you capture the full claim-related cost, not just the payout. Using earned premium as the denominator aligns revenue with the period of exposure, whereas using written premium would overstate revenue for that period. Omitting LAE would understate the true cost of claims. So the correct formula is (losses + LAE) divided by earned premium.

Loss ratio measures how much of the earned premium is used to pay claims and related costs. It is calculated by taking the total cost of claims during the period—losses plus allocated loss adjustment expenses (LAE)—and dividing by the premium that has actually been earned in that period. Including LAE ensures you capture the full claim-related cost, not just the payout. Using earned premium as the denominator aligns revenue with the period of exposure, whereas using written premium would overstate revenue for that period. Omitting LAE would understate the true cost of claims. So the correct formula is (losses + LAE) divided by earned premium.