An insurer compares what it paid in claims against the amount received in premiums to determine its what?

The concept of loss ratio is crucial in the insurance industry, as it measures the relationship between the premiums earned by an insurer and the claims paid out to policyholders. Specifically, the loss ratio is calculated by dividing the total amount of claims paid by the total amount of premiums received over a specific period.

A lower loss ratio indicates that an insurer is retaining more premium income relative to the claims it pays out, suggesting a more profitable operation in terms of underwriting. Conversely, a higher loss ratio may indicate that an insurer is experiencing significant losses on the claims side, which could jeopardize its financial stability.

This metric is significant for evaluating the insurer's efficiency in underwriting and managing risk, thereby providing valuable insights into its overall financial health. Other options, such as expense ratio, net profit, and growth rate, focus on different aspects of an insurer's financial performance, such as operational costs, overall profitability after all expenses, and the increase in business over time, respectively. These do not directly measure the comparison between claims paid and premiums received, which is why the loss ratio is the most accurate term in this context.