How does a high loss ratio affect insurance policy underwriting?

A high loss ratio indicates that an insurance company is paying out a significant amount in claims relative to the premiums it collects. This situation often prompts insurers to reassess their underwriting guidelines and the terms of coverage they offer to maintain profitability. Adjustments may include tightening eligibility requirements, modifying coverage limits, increasing deductibles, or adding exclusions to mitigate future loss risks.

By making these adjustments, the insurer aims to reduce future payouts and ensure that premium income continues to cover claims expenses. This proactive approach to underwriting helps the insurer stabilize its finances and can lead to more sustainable operations in the long run. Thus, a high loss ratio typically results in modifications to coverage terms to align pricing and risk more effectively.