What is a "loss ratio" in insurance terms?

A "loss ratio" is a crucial metric in the insurance industry that reflects the relationship between the premiums an insurer collects and the claims it pays out. Specifically, it is calculated by dividing the total amount of claims paid by the total amount of premiums collected. Understanding this ratio is essential for assessing an insurer's profitability and operational efficiency.

When the loss ratio is high, it indicates that a significant portion of the premiums collected is being paid out in claims, which may raise concerns about the insurer’s ability to sustain profitability. On the other hand, a lower loss ratio suggests better financial health, as the insurer retains a greater portion of premiums as profit after fulfilling its obligations to policyholders. Thus, choice B accurately describes the loss ratio by highlighting the proportion of premiums collected that are allocated towards paying claims.