What does "loss ratio" measure in insurance?

Loss ratio is a key financial metric in the insurance industry that measures the relationship between losses and premiums. Specifically, it calculates the losses incurred by an insurer in relation to the premiums earned over a specific period. This ratio provides insight into the insurer's profitability and risk management effectiveness. A lower loss ratio indicates that an insurer is effectively managing its claims and spending less on losses relative to the premiums it collects, which is generally viewed positively.

This measure is crucial for insurance companies as it helps them assess whether they are pricing their policies adequately to cover future claim payouts. A consistently high loss ratio may signal that the insurer is taking on too much risk or not charging enough in premiums, which could jeopardize financial stability.

The other options do not reflect the concept of loss ratio accurately. The total number of claims filed does not account for the financial aspect of premiums, the number of policies sold does not indicate losses relative to earnings, and administrative costs pertain to operational expenses rather than the relationship of losses to premiums.