Loss cost

Category: Actuarial fundamentals · Reviewed by Matt Bartlett, Director · Founder · Last reviewed

Loss cost

The loss cost is the expected losses per exposure unit. It is broadly synonymous with the pure premium, though US literature distinguishes the two: the loss cost is sometimes the published rate-bureau figure (e.g. NCCI, ISO), while the pure premium is the company-specific estimate.

Use in rating

Loss costs underlie the manual rate in commercial casualty lines, particularly workers compensation in the US. Loss-cost multipliers (LCMs) convert the bureau loss cost into the carrier’s manual rate by applying loadings for expenses, profit and contingency.

UK practice

UK general insurance does not have a bureau structure of the US scale, but ABI working parties and reinsurer market analyses fulfil a comparable benchmarking role for liability, motor and EL lines.

Trending

Loss costs are typically refreshed quarterly or annually and trended forward using:

• Claims inflation indices (e.g. ASHE 6115 for serious injury PI claims).
• Wage and price inflation.
• Judicial Council Guidelines updates.

References

• CAS (2010). Foundations of Casualty Actuarial Science.
• NCCI loss-cost filings (illustrative).
• IFoA. General insurance reserving guides.

Cross-references

• Pure premium
• Burning cost
• Manual rating

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.