Medical loss ratio: definitions and common errors
Incurred claims over earned premium is a definition few would dispute. Two parties applying it to the same portfolio can nonetheless produce figures eleven points apart, because they hold different interpretations of "incurred" and "earned" without stating them. This guide sets out where those differences arise.
Last updated 12 September 2026
Incurred is not paid
Incurred claims comprise paid and outstanding amounts: those settled, together with those notified and reserved. A loss ratio computed on paid claims alone describes the disbursement position rather than the risk, and improves whenever claims processing falls behind.
A third category exists beyond outstanding claims: those incurred but not yet reported. As these have not been observed they cannot appear in either figure, and the extent to which they understate the ratio depends on how recently the period closed. Estimated IBNR.
Earned is not written
A policy written in November has not earned a full year of premium by March. Earned premium is written premium recognised pro rata across the days of cover to the date of reading.
Measuring written premium against part-year claims is the most common reason a growing portfolio appears satisfactory: the premium is recognised at inception while the claims arise across the year, and the ratio is understated by that timing difference until growth ceases.
The net figure should be used rather than the gross. A gross ratio measures the portfolio before reinsurance has assumed its poorest risk, which is not the appropriate basis for determining rates.
The report date forms part of the figure
A loss ratio quoted without a date is incomplete. The same portfolio read at 31 March and at 30 June has a different earned premium, a different exposure and a different quantity of run-off, and therefore a different ratio. Each of those differences is correct.
A historical figure will consequently change when the report date changes. The alternative is a figure held constant against a date that no longer applies. Any figure relied upon should carry the date at which it was computed, and any export issued should state it on the face of the file.
Five errors that overstate performance
- Paid rather than incurred. Improves whenever claims processing slows.
- Written rather than earned. Understates the ratio for any growing portfolio.
- Gross rather than net. Conceals the proportion of risk ceded to achieve the result.
- No reserve for late-reported claims. Understates every recent period, and most of all the period from which rates are to be set.
- Averaging segment ratios. A loss ratio is not additive. The average of ten group ratios is not the portfolio ratio, and the error is largest where the groups differ most in size.
Interpretation
Once the basis is settled, the analysis begins: which group, network, benefit, provider or age band accounts for the movement, and for what proportion of the total. A portfolio at ninety-three per cent because a single corporate group has experienced a catastrophic year represents a different decision from one at ninety-three per cent because outpatient utilisation has risen four points across every segment.
Attribution of movement · Burn cost, where the question concerns risk rather than price