Understanding Insurance Company Loss Ratios

Learning about the components of the term loss ratio is fairly straightforward. Pure loss ratio is computed by dividing total losses by total premium. As an example, if you are paying a $1,000 annual premium and have claims of $100, you divide $100 by $1,000 which produces a pure loss ratio of 10%, which is an excellent result for the insurance carrier.

But when the insurance underwriter reviews your claims history they also consider frequency of loss(es), severity of loss(es), and the expenses of the insurance company which includes all company expenses such as salaries, office rent, human resource benefits, employee bonuses ad infinitum.

 There are 2 other expenses that are included in determining the “combined loss ratio”. These are:

  •  Loss adjustment expenses might include the cost of outside insurance adjusters, legal expenses incurred in defending “the insured” which would most likely be a general liability issue. And,
  •  Loss reserves are determined by assigning an estimated cost of a claim and are subject to periodic review and can be adjusted up or down

The loss ratio then determines whether or not the insurance company will cover your building and how much your premiums and deductibles will be.  High loss ratios might even mean your carrier will not cover you.

In this case, this leaves the building owner with what is referred to as the excess and surplus lines insurance marketplace, which does not adhere to guidelines set by state insurance regulators. In this marketplace, it is not uncommon to see 100%, 200%, 300% or more PREMIUM INCREASES and/or extremely high deductibles for risks like water damage.

Flooding in buildings and/or reoccurring water damage claims is one sure way to drive up loss ratios. Water damage, according to numerous industry reports represent more than 50% of all property related losses (over $10 billion/year). With the very sophisticated and cost efficient IoT, wireless water leak sensors available today, it is a mystery to the author why building owners and insurance companies do not require wireless water leak sensors in every building.

These sensors can detect leaks instantly and communicate to maintenance personnel on site, or even at home, the precise location of the leak so it can be fixed before it becomes a flood.  The technology now can even instantly shut off water supply to the leak. All ensuring claims are held to a minimum, loss ratios remain favorable for the insured and that a very positive ROI is virtually guaranteed on the cost of system.

With the aforementioned possible outcomes, it occurs to me that all parties involved in the insurance buying transaction, should educate themselves about wireless water leak detection and notification technologies.  FM Approvals tests and certifies the best equipment across the board for loss prevention, which is good place to start. Then that information should be shared with INSURANCE AGENTS AND BROKERS, insurance company underwriters, loss control and risk management personnel and insurance company executive teams, and others who are in a position to influence RISK PROFILE IMPROVEMENT

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