One classic way to adjust rates looks at how actual experience compares with the target. The loss ratio method develops indicated rate changes by comparing the experienced loss ratio with the permissible or target loss ratio. If experience is worse than target, rates need to rise; if better, rates may fall.

Actuaries bring past losses to current level with development and trend factors, then form the adjusted loss ratio. The indicated rate change is roughly the ratio of adjusted experience to the permissible loss ratio, minus one. The method is straightforward and widely used for class-rated lines.

Credibility weighting with complementary data prevents overreaction to thin experience. Large rate swings may be capped for regulatory or marketing reasons. The loss ratio method remains a foundational technique taught to every pricing actuary and applied in countless rate filings.

• Rate indication based on experience versus target loss ratio
• Uses developed and trended historical losses
• Simple and widely applied in pricing
• Often credibility-weighted and subject to caps