Long Term Care Certification Practice Test

To calculate the loss ratio, you need to determine the proportion of claims paid out relative to the premiums earned. The loss ratio is calculated using the formula:

Loss Ratio = (Claims Paid / Premiums Earned) x 100%

In this scenario, the company has received $20 million in premiums and paid out $12 million in claims. Using the formula:

Loss Ratio = ($12 million / $20 million) x 100% = 0.6 x 100% = 60%

This result shows that 60% of the premiums collected were used to pay claims. A loss ratio of 60% indicates that the company has a significant portion of its premiums going towards covering claims, which is an important measure for insurance companies to assess their financial health and operational efficiency.