How is the loss ratio calculated?

The calculation of the loss ratio is an essential part of assessing an insurance company's profitability and efficiency. It is determined by taking the total claims paid out by the insurer and dividing that figure by the total premiums earned during the same period. This ratio provides insight into how much of the premium income is being used to cover claims, which helps in evaluating the underwriting performance of the insurer.

A high loss ratio might indicate that the insurer is paying out a significant portion of its earned premiums in claims, which can be a warning sign of potential profitability issues, whereas a low loss ratio often suggests that the insurer is effectively managing its risk and claims expenses. This calculation is key for insurers to monitor their financial health and make necessary adjustments to their underwriting strategies.

In contrast, the other options do not reflect the correct methodology for calculating the loss ratio. For instance, dividing total premiums earned by total claims paid would yield a ratio that does not accurately represent the relationship between claims and premiums. Additionally, calculations based on policies issued or asset and liability values are unrelated to the loss ratio, which specifically relates to claims against premiums.