Loss Ratio
Loss ratio is the percentage of premiums paid out as claims by a carrier — for an agency, the loss ratio of business placed with each carrier directly drives contingency commission income.
What is loss ratio?
Loss ratio = incurred losses ÷ earned premium, expressed as a percentage. For a carrier, a 60% loss ratio means $60 in claims for every $100 of premium. The remaining 40% covers expenses and profit.
For an agency, the loss ratio matters because it determines contingency commission eligibility. Most carrier contingency programs pay a sliding-scale bonus based on loss ratio: a 50% loss ratio might earn 6% of premium, a 60% loss ratio might earn 3%, and a 75% loss ratio might earn zero. An agency that consistently delivers low loss ratios to its carriers is one carriers want to keep, support, and pay.
A 'profitable' agency book — one that consistently runs below the carrier's average loss ratio — is a meaningful selling point in any acquisition conversation, particularly for buyers focused on long-term carrier relationships.
Why it matters in agency valuation
Agency-level loss ratio is rarely captured in standard valuation methods, but it surfaces in two places: contingency commission run-rate (which feeds revenue) and carrier-relationship strength (which feeds book-roll probability). A book with consistently strong loss ratios is a multi-year compounding asset.
Example
Related terms
Contingency commissions are bonus payments carriers pay agencies based on the profitability and growth of the business placed with them, typically 1–10% of premium volume.
A carrier appointment is the formal contract that authorizes an agency to write business with a specific insurance carrier — direct appointments are agency-owned, while cluster or wholesale appointments are accessed through an intermediary.
Last reviewed: April 24, 2026
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