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Insurance Loss Ratios: Licenses to Steal?

30 Apr

If you are not a frequent reader of my blog, you may not know that I’m an Insurance Litigator. My readers will tell you I’m also a very curious Insurance Litigator – always reading and asking questions. I was recently reading about long term care (LTC) insurance and discovered an insurance concept I think everyone should know about (not just insurance industry insiders). The concept is called “loss ratios.”

What is a Loss Ratio?

A loss ratio is the percentage of your premiums your insurance company has full government authorization to keep. If that seems strange to you, it should. Why would the government give insurance companies permission to keep most of your premiums? You buy insurance because you expect to be paid when you suffer a loss. If insurers are allowed to keep a certain amount of your premiums, they most certainly will attempt to keep as much of that amount as possible! What an excellent motivation to wrongfully deny your claim – insurance companies are profit-driven businesses, after all.

Example of a Loss Ratio

NAIC logoFor example, the National Association of Insurance Commissioners (NAIC) has drafted model regulations* that allow insurance companies to keep 40% of the premiums collected for Long Term Care (LTC) policies. It doesn’t matter if the LTC policyholder actually needs more care than 60% of what they paid in premiums – insurers won’t be required by government regulations to pay it. Of course, if you have been denied your insurance benefits and you hire an insurance attorney, you can enforce your legal rights through other channels. But the government isn’t stopping insurance companies from underpaying you at the outset.

How to Calculate a Loss Ratio

My crude, yet ingenious graphic on loss ratios. Please excuse my handwriting and my sarcasm!

My crude, yet ingenious graphic on loss ratios. Please excuse my handwriting, and if you are feeling generous, my sarcasm!

Loss ratios are calculated by a simple equation in which you place the insurance company’s “loss,” or amount paid to policyholders in benefits (don’t you love that when they pay the benefits they owe, they call it “loss”?) above the amount the insurance company has collected in premiums. You divide the “loss” by the “premiums” to get the loss ratio. I’ll include a crude graphic to help you visualize.

I promise to look further into this concept and report what I find.

*NAIC model regulations have historically been adopted by most state insurance codes. See Section 19 for the Loss Ratio clause.

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