Glossary · Insurance agency commissions
Loss ratio
A loss ratio is incurred losses divided by earned premium, shown as a percentage. For an agency, the loss ratio on its own book with a carrier is often the number that decides whether a contingent or profit-sharing commission is paid, and it can shape the supplemental rate offered for the following year.
What it means
The NAIC’s glossary of insurance terms defines the loss ratio as “the percentage of incurred losses to earned premiums.” Incurred losses include claims paid and reserves set aside for claims not yet paid, so the ratio can move after the year ends as reserves change.
How it works: divide incurred losses by earned premium for the same period and multiply by 100. Carriers measure it for the whole company, for each line and for each agency’s book. Which losses count, whether loss adjustment expense is included, and whether large claims are capped are set by each carrier’s contingent agreement, not by one universal formula.
How it shows on a commission statement
A loss ratio rarely sits on a monthly commission statement. It shows up on the annual contingent or profit-sharing statement, usually with earned premium, incurred losses and the resulting ratio for your agency code, and sometimes on a mid-year progress report. Check that the earned premium matches your own figure for the codes included, and that the losses are as of the date your agreement names.
Example
- Earned premium for the year, agency book
- $850,000.00
- Claims paid
- $310,000.00
- Reserves on open claims
- $95,000.00
- Incurred losses (paid + reserves)
- $405,000.00
- Loss ratio, $405,000 ÷ $850,000
- 47.6%
Commonly confused
- Combined ratio adds the expense ratio to the loss ratio and describes the carrier’s profitability, not one agency’s book. See combined ratio.
- Paid loss ratio uses only claims already paid; most contingent agreements use incurred losses, which include reserves.
- Contingent commission is the payment; the loss ratio is one of the inputs. See contingent commission.
Common mistakes to check
- Dividing by written premium when the agreement uses earned premium.
- Comparing your own paid-claims figure with the carrier’s incurred losses, which include reserves.
- Not checking which agency codes and lines the carrier included in your book.
- Treating a mid-year loss ratio as final when reserves can still change.
Questions
How do you calculate a loss ratio?
Divide incurred losses by earned premium for the same period and multiply by 100. Incurred losses are claims paid plus reserves on open claims. Some carriers add loss adjustment expense; the contingent agreement says which.
What is a good loss ratio for an insurance agency?
There is no single number. Each carrier sets the loss ratio thresholds in its contingent or profit-sharing agreement, and they differ by carrier and line. Read the agreement rather than a rule of thumb.
Why did my loss ratio change after the year ended?
Because reserves on open claims were raised or lowered, or late claims were reported. Incurred losses keep moving until the claims are closed.
Sources
- National Association of Insurance Commissioners, Glossary of Insurance Terms, entry for loss ratio. Retrieved October 12, 2026.
Lapidar is commission reconciliation software for independent insurance agencies, in its founding pilot. Related: insurance loss ratio calculator.