Loss Ratios & Combined Ratios

The Loss Ratio: Your Key Performance Indicator

The loss ratio is the single most important metric in insurance. It tells you what percentage of every cedi of premium is going to pay claims.

Loss Ratio = Incurred Claims / Earned Premium × 100%

A loss ratio of 60% means for every GHS 100 of premium earned, GHS 60 goes to claims. The remaining GHS 40 covers expenses, commissions, and profit.

What's a good loss ratio? It depends on the product:
→Motor: 60–65% is typical. Above 70% is concerning. Above 80% is unsustainable.
→Fire: 40–50% is typical (fire claims are less frequent but can be severe).
→Life: Varies enormously by product type.
→Health: Often 75–85%: health insurance operates on thin margins.

In Ghana, motor loss ratios have frequently exceeded 80% across the industry, driven by price competition and fraudulent claims. This is why several motor insurers have faced financial difficulties.

The Combined Ratio: The Full Picture

The loss ratio alone doesn't tell you if the company is making money. You also need to account for expenses.

Combined Ratio = Loss Ratio + Expense Ratio

Where Expense Ratio = (Operating Expenses + Commissions) / Earned Premium × 100%

Interpretation:
→Combined ratio below 100% = underwriting profit. The company is making money from insurance operations alone.
→Combined ratio of exactly 100% = breakeven. No underwriting profit, but no loss either.
→Combined ratio above 100% = underwriting loss. The company is losing money on insurance operations.

Example:
Loss ratio: 65%. Expense ratio: 35%. Combined ratio: 100%. This means the company breaks even on underwriting: no profit, no loss. Any return to shareholders must come from investment income on the premiums held before claims are paid.

In Ghana, many insurers operate with combined ratios above 100%, meaning they rely on investment income to remain profitable. This is risky because investment returns are not guaranteed, and it masks fundamental underwriting problems.

Using Ratios to Make Decisions

Understanding these ratios helps every professional in the company, not just actuaries:

If you're an underwriter: A portfolio with a rising loss ratio tells you prices are too low, risk selection is poor, or claims inflation is outpacing rate increases. Time to review your book.

If you're in sales: Understanding that the company needs a combined ratio below 100% helps you explain to clients why premiums can't be endlessly discounted. You're not being difficult: you're keeping the company solvent so it can actually pay claims.

If you're in claims: Your efficiency directly impacts the expense ratio. Faster, fairer claims handling reduces expenses and improves the combined ratio.

If you're in management: These ratios should be tracked monthly, by product line, by branch, and by distribution channel. A 65% overall loss ratio might hide a 120% motor ratio being subsidised by a 30% fire ratio. You need to see the detail.