How can insurance loss ratios be accurately calculated?

The calculation of insurance loss ratios is a critical metric used to assess the profitability of an insurance company. The loss ratio is calculated by dividing the total losses (or claims paid) by the total premiums earned. This ratio gives insight into how much of the earned premiums are being used to cover claims, thus indicating the efficiency and performance of the insurance underwriting.

In this context, dividing total losses paid by total premiums earned accurately reflects the company's claims experience relative to premium income. A lower loss ratio suggests better performance, as it indicates that a smaller proportion of premiums is being used to pay out claims, leaving more for operating costs and profit.

Other options do not represent the correct formula. Multiplying total losses by total premiums earned does not provide a ratio but rather a statistical figure that doesn’t have practical interpretative value in this context. Similarly, adding total losses to total premiums earned fails to establish a relationship between incurred claims and earned premiums. Assessing total claims over a five-year period, while potentially informative for trend analysis, does not directly yield a current loss ratio but rather a view of historical claims trends. Therefore, only the division of total losses paid by total premiums earned provides the accurate representation of the loss ratio.