Guide to Loss Ratio in Health Insurance

In this article, you will learn what a loss ratio is and how to interpret it. If you are in charge of your company’s group medical plan, knowing your loss ratio will not only help with budgeting, it will also help you determine the suitability of the policy for your organization.

What is a loss ratio?

In the insurance industry, the loss ratio is an indicator that insurers use to assess the financial health and profitability of a policy they’ve sold. Insurance companies aim to minimize the loss ratio of a policy to maximize profitability.

But the loss ratio metric is not only useful for insurers – it is also very helpful for HR and group health plan administrators who know how to interpret it.

How is the loss ratio calculated?

The loss ratio is a percentage calculated with the formula:

Loss ratio = [ (Claims paid + Other expenses) / Premiums earned ] * 100

How do I find out my loss ratio?

In most cases, you won’t have access to your employees’ claims history because of privacy reasons, so you’ll need to get in touch with your insurance advisor to find out the loss ratio.

An exception is if you have a group policy with full medical underwriting, where each insured person has had to declare their medical history. In this case, you might be able to get a full breakdown of claims and reimbursements and therefore calculate the loss ratio.

In both scenarios, because the loss ratio can impact your annual P&L budget, it’s best to ask your insurance advisor for help to accurately determine your loss ratio 10 months into your policy. With their expertise and experience, your advisor can help you obtain and interpret the metric and devise a strategy so your team can get the most out of their employee health benefits.

What does the loss ratio mean?

A policy with a higher loss ratio suggests a lower profit margin and therefore a higher risk to insurers. Conversely, a policy with a lower loss ratio suggests a higher profit margin and therefore a lower risk to insurers.

According to Alea’s experts, a loss ratio of 30% is considered ideal by insurers. Realistically, a loss ratio is considered healthy if it is below 50-60% (for community-rated plans) or 70-80% (for tailored plans). Anything higher might raise a red flag. A loss ratio over 100% means the insurance company is suffering a loss on the policy.

How does the loss ratio affect premiums?

If the loss ratio for your group medical policy is considered too high by the insurance company, they may raise your premiums or decline to renew your insurance policy.

Let’s say the loss ratio on your policy is 90%. To minimize the ratio and maximize profitability, the insurer might increase your premiums the following year or decline to renew your policy.

What can I learn from the loss ratio?

The loss ratio is a good indicator of the health of your group insurance policy.

Higher loss ratio

A high loss ratio may indicate that your employee health benefits are insufficient, that someone on your team has been suffering from a major or chronic illness, or that someone has been in a serious accident.

In this case, your insurer will probably raise your premiums at renewal. If you predict such an increase is coming your way, you can make the necessary budgetary preparations for the coming year.

If there was an anomalously large claim because of an accident, or if an individual suffering from a major illness has left the company, you might be able to negotiate with your insurer to minimize the premium increase at the time of renewal.

Whatever the case, it never hurts to consult with your insurance advisor for support. They will give you recommendations to optimize your plan, such as adding a co-pay to prevent employees from abusing your group policy.

Lower loss ratio

If your loss ratio is low, meaning the claims your team has made haven’t matched the coverage you’ve paid for, your employees might not be using their plan. Maybe the level of coverage is higher than your team needs. Or maybe they aren’t happy with what the plan offers. To rule out the latter, you can survey your employees anonymously to assess their satisfaction with the plan.

If you consult with your insurance advisor, they might recommend adjusting your policy or shopping around for another plan with lower coverage to save on costs.

Why talk to an insurance advisor?

Since each company has its own values and needs, it’s best to speak with an insurance advisor to discuss any changes that can be made to the policy itself and your premiums to meet your employee health insurance goals. Your advisor can also help you develop strategies to contain costs or educate employees about using (and not abusing) their employee health benefits.