Long Term Care Certification Practice Exam – Prep, Study Guide & Practice Questions

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A company receives $20 million in premiums during the year and pays out $12 million in claims. What is the company's loss ratio?

40%

50%

60%

To calculate the loss ratio, you need to determine the proportion of claims paid out relative to the premiums earned. The loss ratio is calculated using the formula:

Loss Ratio = (Claims Paid / Premiums Earned) x 100%

In this scenario, the company has received $20 million in premiums and paid out $12 million in claims. Using the formula:

Loss Ratio = ($12 million / $20 million) x 100% = 0.6 x 100% = 60%

This result shows that 60% of the premiums collected were used to pay claims. A loss ratio of 60% indicates that the company has a significant portion of its premiums going towards covering claims, which is an important measure for insurance companies to assess their financial health and operational efficiency.

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