Pricing Adequacy Calculator

An adequacy ratio below 100% means the premium currently being collected falls short of what's needed to cover projected ultimate losses, fixed expenses, variable expenses, and the target profit margin all at once. It's a signal that a rate increase, expense reduction, or reunderwriting of the book may be warranted, though the calculator doesn't tell you which lever is the right one to pull — that depends on the underlying cause of the shortfall.

Required Premium is the premium level needed to cover projected losses, fixed expenses, your target profit margin, AND the variable expense load on top of all three (since Variable Expense Ratio applies to whatever premium is ultimately charged). Break-Even Premium is the lower figure needed to cover just the losses, fixed expenses, and that same variable expense load, with zero profit built in — the difference between the two shows exactly how much additional premium your target profit margin is adding on top of simply not losing money.

Variable expenses like agent commissions, premium taxes, and certain fees scale directly with the amount of premium written, so they're naturally expressed as a percentage of premium rather than a fixed dollar figure. This lets the calculator correctly project how variable costs would change if the required premium itself needs to rise to reach adequacy, which a flat dollar assumption couldn't capture.

The adequacy ratio compares collected premium against the FULL required premium, which includes expenses and profit margin on top of losses. The adjusted loss ratio compares projected losses alone against collected premium, ignoring expenses and profit entirely — it's a narrower diagnostic useful for isolating whether losses specifically (as opposed to expense creep or an unrealistic profit target) are driving any pricing shortfall.

No — this is a simplified, single-period adequacy check intended for a quick directional read. A complete actuarial rate filing analysis would also incorporate loss development factors, trend projections, reinsurance costs, investment income offsets, and formal risk margins, none of which this calculator models. Use it to flag whether a deeper rate review is warranted, not as a substitute for one.