Expected Loss Ratio (ELR) is a method used by insurers to estimate the amount of claims relative to the anticipated premiums they will earn. By setting aside a portion of premiums obtained from policies they insure, insurers are able to prepare for payment of any future claims they may receive.

Expected loss ratios are calculated with an estimation of the portion of premiums that are likely to be paid in terms of future losses associated with the policy. Insurers use a statistical approach to come up with a reasonable and reliable estimation for their expected loss ratio. This figure goes into the calculations for the premium that each policy holder must pay in order to obtain coverage.

Insurers will use the expected loss ratio method to determine the amount of premiums they set aside from policies to pay for future claims when there is a lack of past data. When analyzing an established business or business line, insurers will use the chain ladder method to determine the claims they will receive in the future.

The expected loss ratio concept is an important part of the basis of most insurance pricing models and calculations. It allows insurers to have some surety with regard to what claims they may expect and how much money will be needed for payment of those claims. The ratio helps insurers be more confident and set more accurate rates for their customers by having a more realistic and accurate view of potential claims costs.

Above all, the expected loss ratio method helps insurers to be prepared for future claims and be sure to have the funds available when they’re needed. This method, in addition to other methods, allowed the insurance industry to become one of the most secure and reliable sectors for financial protection.