Expected Loss Ratio (ELR) Method
Categories: Insurance, Retirement
An insurance company's business works like this: clients pay premiums...if one of those clients suffers an unexpected catastrophe, the insurance company pays out to fix the problem or replace the things destroyed in the event. Given this set-up, the insurance company has to bring in more money (hopefully significantly more money) in premiums than it pays out in losses. Otherwise, it won't stay in business very long.
The Expected Loss Ratio is a way of predicting the relationship between the money coming in and the money going out. It compares the projected losses from claims with the amount the company plans to collect in premiums.
When a company has a large set of data, there isn't much guesswork involved. However, when entering a new business line, or in situations where limited data is available, the insurer has to rely on projections. The ELR provides a framework to these educated guesses.