Loss ratios and rate filings: how insurers justify an increase

An insurer justifies a rate increase by showing its state regulator that the premiums it currently charges will not cover the claims, claim-handling costs and expenses it expects over the coming policy period. The core evidence is the loss ratio, claims as a share of premium, projected forward with trend and development factors and compared with the loss ratio the company needs to break even. That comparison, plus supporting data, goes into a rate filing that the state reviews before or after the new rates take effect.

The ratios that drive a filing

• Loss ratio: incurred losses divided by earned premium. If an insurer earned $100 million of premium in a state and incurred $75 million in claims, its loss ratio is 75%. "Incurred" includes claims paid plus the insurer's estimate, or reserve, for claims still open.
• Loss adjustment expense (LAE): the cost of investigating, defending and settling claims, often added to losses as a "loss and LAE ratio."
• expense ratio: underwriting expenses such as commissions, salaries, premium taxes and advertising as a share of premium.
• combined ratio: the loss and LAE ratio plus the expense ratio. Under 100% means an underwriting profit; over 100% means the insurer paid out more than it collected before investment income.

Actual figures show how quickly these move. In the NAIC's 2022/2023 Auto Insurance Database Report, the countrywide loss ratio for auto liability coverage (incurred losses over earned premium, before expenses) rose from 61.4% in 2020 to 76.8% in 2021 and 81.5% in 2022. For collision it went from 56.5% to 77.8% to 89.3%. Add an expense ratio and loss adjustment costs on top and those 2022 figures imply underwriting losses, which is why large rate increases followed in 2023 and 2024.

How a rate indication works

Actuaries do not simply compare last year's claims with last year's premium. They:

1. Gather several years of experience, usually three to five, so one bad year does not dominate.
2. Develop losses to ultimate. Injury claims can stay open for years, so recent years are adjusted upward to their expected final value.
3. Trend losses forward to the period the new rates will cover, using claim frequency and severity trends.
4. Restate premium at current rates ("on-leveling"), so past rate changes are reflected.
5. Compare with the permissible loss ratio, the share of premium left for claims after expenses and the profit provision.

Here is a simplified, hypothetical example. Say an insurer's average premium in a state is $1,200 per car. After development and trend, it projects losses and LAE of $960 per car for the coming year. Its variable expenses and profit provision total 25% of premium, so its permissible loss and LAE ratio is 75%. The indicated premium is $960 / 0.75 = $1,280, a 6.7% increase. If trend had pointed down and projected losses were $840, the same math gives $1,120, an indicated decrease of 6.7%.

The filing does not have to request the full indication. Insurers often ask for less to stay competitive, or phase changes in, and they also file changes to individual rating factors that make the effect differ from driver to driver.

What is in a rate filing

A typical private passenger auto filing includes:

• The overall average rate change requested, by coverage.
• The range of changes, since some policyholders see more and some less.
• The number of policyholders affected and the written premium involved.
• The actuarial memorandum: loss experience, development, trend, expense and profit assumptions.
• Revised rating manual pages, such as new territory or vehicle factors.

Many states let the public search filings through the NAIC's SERFF Filing Access system, linked from the state insurance department's website. Others post approved rate changes in press releases or searchable databases.

How regulators review filings

States use different systems; the NAIC's report lists each state's rules, and our guide to how rate approval works compares them.

• prior approval: the regulator must approve rates before they are used. California and Michigan are examples.
• file-and-use and use-and-file: rates can be used when filed, or filed after use, with the regulator able to act if they violate the law.
• Flex rating: changes within a band can be used without prior approval.

Regulators check that rates are not excessive, inadequate or unfairly discriminatory. The Insurance Research Council found that from 2010 to 2023 the average number of days to approve a personal auto filing grew about 40%, and the share of filings approved for less than requested grew about 10 percentage points. Insurers argue delays leave rates inadequate; consumer advocates argue review keeps increases honest.

Rules are changing in several states:

• New York: the 2026-27 state budget ended flex rating for increases. Under the old system insurers could take up to two overall increases without prior approval if their cumulative effect stayed within 5%. The Department of Financial Services proposed a regulation on September 9, 2026 requiring express prior approval for any increase.
• Illinois: in August 2026 the governor signed HB 4273 and SB 714, letting the Department of Insurance object to auto and home rates it finds excessive, inadequate or unfairly discriminatory, according to Carrier Management.
• Louisiana: Act 11 of 2025 repealed the distinction between "competitive" and "noncompetitive" markets that had limited the commissioner's power to disapprove rates, and requires renewal notices to show the prior premium.

When profits run too high

Some states require refunds when profits exceed a threshold. Florida's excess-profits statute (section 627.066) requires auto insurers to return excess profits to policyholders. In September 2025 Progressive recorded a $950 million policyholder credit expense for an estimated 2.7 million Florida policyholders, according to the Florida Office of Insurance Regulation. New York's 2026 budget added a similar rule: underwriting gains over three years that exceed expected profit by more than 5% of earned premium must be returned. Falling loss ratios are the other side of the cycle; Florida reported a personal auto liability loss ratio of 52.5% in 2025, the lowest in the state in 15 years.

How to use this as a policyholder

1. Note your renewal change and ask the insurer whether it reflects a statewide rate filing or a change to your own rating.
2. Look up the filing on your state insurance department's site or SERFF Filing Access and compare the average change with yours.
3. If yours is far above the average, ask which factors changed; the renewal rate increase checker lists the usual suspects.
4. If you believe a rate was applied incorrectly, contact your state insurance department.

Key takeaways

• A loss ratio is claims divided by earned premium; add expenses to get the combined ratio, the measure of underwriting profit.
• Rate indications project losses forward with development and trend and compare them with a permissible loss ratio.
• Filings are public records in most states and show the average change, the range and the reasoning.
• New York, Illinois and Louisiana expanded regulators' rate powers in 2025 and 2026, while Florida and New York require refunds of excess profits.