Target loss ratio (TLR) indicates the percentage of premium dollars that are allocated to pay claims. If the TLR is 80%, this means that for every dollar of premium paid, the insurance company expects to pay out 80 cents in claims. The additional 20 cents covers: insurer administration costs, advisor commission, claims payment costs, profit charge and premium tax.
When the policyholder’s claims are in excess of the TLR, theoretically, the insurance company will need to increase their rates. When the claims are lower than the TLR, they are charging too much and should be able to lower them. This, however, depends on how credible the claims experience is.
TLR is 1 of 7 factors that influence group benefit rate adjustments.