Loss ratio

According to the NAIC, the average cyber loss ratio of the top 20 U.S. groups, standalone and package combined, rose from 44.6% in 2019 to 66.9% in 2020, a jump of more than twenty-two points in a single year. The loss ratio compares incurred claims to earned premiums over a given period. It measures the share of premium eaten up by the pure cost of risk, before administrative and acquisition expenses. It is the first building block of the combined ratio and the most direct read on a portfolio's underwriting quality. Incurred claims include paid claims plus reserves for losses that have already occurred, including those not yet reported, so the ratio depends on reserving assumptions. That is where to be careful. A flattering loss ratio in a recent year can deteriorate sharply once late claims come in, which happens often on long-tail lines such as liability. Underwriters often separate the gross loss ratio, before reinsurance, from the net ratio, after cession, and the gap shows how well the reinsurance protection works. In cyber, the loss ratio swings widely from one year to the next, because the risk is young and correlated.