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Loss Ratio and Medical Loss Ratio

In insurance, loss ratio is one of the most important elements that should be taken with regard. This is the term that is used to determine the policy’s overall profitability. The loss ratio is primarily gives comparison to the amount that the insurance provider spends to meet the claims made and the amount of money that is obtained by the policyholders’ payment to the insurance premium rate. It is also describe as the ratio of the company’s total losses through pay out on the claims plus the adjusted cost divided by the sum of the total premium earned. For instance, if the company paid out $50 on claims of a $100 premium, then 50% is the loss ratio.

The health insurance loss ratio also referred to as the medical loss ratio ranges from 60 percent to 110 percent while loss ratio in casualty and property insurance range from 40 percent to 60 percent. These companies usually collects higher premium than the amount of money paid for claims. Generally, insurance company’s who usually have greater loss ratios is in poor financial state.

In terms of medical loss ratio, it is described as the amount of generated income from the health insurance premiums that were used to pay for medical care and services that is a part of the coverage of the plan. This amount will be used to pay for the medical care and services rendered by the hospital to the insured. It is also defined as the sum of health benefits which will be divided by the total premium paid. Often known to be in a ratio form such as 0.86 -which explains that 86% of the premium is used to pay for the medical expenses. The goal of this ratio is to be below 1.00 most preferably in the range of 0.80 since the insurance provider’s profits only in the premiums paid by the insured.

To compute for the loss ration, the company should determine first the basic factors such as the amount of money used to pay out for the claims made and the adjustment expenses. Then, the company will have to calculate for the earned amount they received from the premiums paid by the customers. After that, the pay outs for claims will be divided by the sum of the premiums and then the resulting figure will be converted to percentage form.

It is very important that loss ratio will be determined by the insurance company since this will reflect on how the company is kicking in the market and how successful is the company with that business model. If the resulting ratio is very high then it is most likely that the company is not earning enough profit. On the other hand, if the ratio is low, then problems may be doomed to arise sine this will explain that the company might be charging too much and premiums and are not putting enough payment to the claims.