How do insurers decide what you pay? In 2025, the Expected Loss Ratio (ELR) method is at the heart of Australia’s insurance premium calculations. But with regulatory tweaks and new risk data, the way ELR works—and what it means for your business or household—deserves a closer look.
What is the Expected Loss Ratio (ELR) Method?
The Expected Loss Ratio (ELR) method is a forecasting tool that helps insurers estimate the proportion of premiums they expect to pay out in claims. In plain English, it’s a way to predict how much of every premium dollar will go back to policyholders as claims, versus how much is retained for expenses, profit, and contingencies.
- Premiums are calculated by estimating the likely claims (losses), then dividing by the ELR to ensure enough is collected to cover claims, costs, and profit.
- Example: If an insurer expects $700,000 in claims on $1 million of premiums, the ELR is 70%. If risk increases, so does the ELR—and your premium.
ELR is essential in both personal (car, home, health) and commercial (property, liability) insurance lines. It’s especially crucial for new or rapidly evolving risks, where historical data is limited and actuaries must lean heavily on forecasts and external data.
2025: Regulatory Updates and the ELR
Several shifts in the Australian insurance landscape are impacting how ELR is calculated and applied:
- APRA’s 2025 Prudential Standards: The Australian Prudential Regulation Authority (APRA) has introduced tighter requirements for insurers to justify their ELR assumptions, particularly in light of climate change, cyber risks, and the increased frequency of natural catastrophes.
- Mandatory Climate Risk Disclosures: From July 2025, insurers must factor climate-related risks into their ELR projections, impacting premiums in flood, bushfire, and cyclone-prone regions.
- Consumer Data Right (CDR) Expansion: Broader access to policyholder data is enabling more accurate ELR calculations, but also raising the bar for compliance and transparency in pricing models.
These updates mean insurers can no longer rely solely on backward-looking averages. Instead, they must blend historical loss data with forward-looking risk assessments—changing how premiums are set across the board.
How Does the ELR Method Affect Policyholders?
Understanding ELR isn’t just for actuaries and underwriters. It has real-world impacts for Australian households and businesses:
- Premium Volatility: As insurers update their ELR models to account for emerging risks, some premiums may rise sharply—especially in high-risk areas or industries. For example, property owners in North Queensland saw average premium increases of over 20% after new flood risk data was factored into ELR calculations in late 2024.
- Greater Transparency: APRA’s new standards require insurers to explain premium changes more clearly, so you can see how loss expectations drive costs.
- Opportunities for Risk Mitigation: Businesses and individuals who proactively reduce their risk profile (e.g., installing flood barriers, enhancing cybersecurity) may see direct premium reductions as their expected losses—and thus the ELR—drop.
For brokers and risk managers, understanding the ELR can support smarter negotiations and help clients prepare for upcoming premium shifts, rather than being caught off-guard.
ELR in Practice: Real-World Example
Let’s say you operate a logistics company with a fleet of delivery vehicles. In 2025, your insurer uses the ELR method, factoring in:
- Recent accident data (higher than average due to increased traffic congestion)
- Regulatory changes (higher minimum coverage for commercial vehicles)
- Telematics data from your fleet (showing improved driver behaviour)
Your expected loss ratio, once 65%, is now revised to 75% due to rising accident frequency and new regulations. Premiums increase, but because your telematics data shows a downward trend in risky driving, your insurer offers a discount, partially offsetting the hike. This demonstrates how ELR is dynamic and influenced by your real-world risk management efforts.
Key Takeaways for 2025 and Beyond
- The ELR method remains the backbone of insurance pricing in Australia, but is evolving rapidly in response to regulatory and environmental pressures.
- Premiums are increasingly sensitive to both historical and forward-looking risk data, including climate and cyber threats.
- Understanding your insurer’s ELR approach can help you budget for premium changes and identify opportunities to reduce costs through risk mitigation.
