What is the impact of a high loss ratio on an insurance company?

A high loss ratio in an insurance company indicates that the amount paid out in claims is a significant portion of the premiums collected. This situation suggests that the company is paying out more in claims than it is earning from premiums, which can compromise its financial stability.

When an insurance company experiences a high loss ratio, it may respond by raising premiums for policyholders. This increase is necessary to ensure that the company maintains its ability to cover claims and remain solvent. Higher premiums help to offset the losses incurred from claims and contribute to more sustainable financial practices moving forward.

The other options present different implications. Profitability and stability would generally associate with a lower loss ratio, whereas the need for additional coverage options is not a direct consequence of a high loss ratio. Additionally, lower administrative costs would not typically correlate with a high loss ratio, as increased claims can lead to more complex administrative processes. Thus, the relationship between a high loss ratio and resulting higher premiums is a key aspect of how insurance companies manage their financial health.