Which of the following best defines a loss ratio?

A loss ratio is a key performance indicator in the insurance industry that quantifies the relationship between the claims paid out to policyholders and the premiums that have been earned by the insurer. Specifically, it is calculated by taking the total amount of claims incurred (including both paid claims and any claims that may be outstanding) and dividing that by the total earned premiums during a specific period.

This metric is essential for assessing the underwriting performance of an insurance company. A lower loss ratio indicates better profitability, as it signifies that the insurer is paying out a smaller portion of its earned premiums as claims compared to what is retained. Conversely, a higher loss ratio may suggest that the insurer is facing challenges with underwriting and may not be sustainable in the long run.

The other options do not accurately depict the loss ratio. While the total income generated by an insurance policy pertains to overall revenues, it does not focus exclusively on claims versus earned premiums. Similarly, expenses incurred from running an insurance business relate to operational efficiency rather than specific claim payouts, and the financial stability of an insurer encompasses various aspects beyond just the relationship of claims and earned premiums, such as reserve adequacy and investment income.