In terms of insurance, what does 'loss ratio' indicate?

The term 'loss ratio' in the context of insurance is a critical metric that reflects the relationship between the claims paid by an insurer and the premiums collected over a specific period. It is expressed as a percentage and is calculated by dividing the total amount of claims incurred by the total premiums earned.

When the loss ratio is calculated, it provides insight into the underwriting profitability of an insurance company. A lower loss ratio suggests that the insurer is collecting more in premiums than it is paying out in claims, indicating sound underwriting practices and profitability. Conversely, a higher loss ratio may indicate that the insurer is facing higher than expected losses, which could lead to financial difficulties if it is not managed properly.

In this context, the other options do not accurately characterize the loss ratio. Claim counts, average payouts, and policy duration are important insurance metrics, but they do not reflect the direct relationship between claims paid and premiums collected, which is the essence of what the loss ratio indicates.