What is loss cost in insurance

To put it simply, loss costs are the aggregate cost needed to pay strictly for the cost of claims. In the traditional insurance marketplace, insurance companies also consider their own overhead and profit when developing premium rates. This is called the loss cost multiplier.

What are lost costs?

Loss cost, also known as pure premium or pure cost, is the amount of money an insurer must pay to cover claims, including the costs to administer and investigate such claims. Loss cost, along with other items, is factored in when calculating premiums.

What is not included in loss costs?

Loss costs do not include expenses common to all businesses such as salaries, rent and utilities. It is up to each insurance company to develop its own loss cost multipliers (LCM), which is the second component of your rate. This component is based on the company's own operating expenses, taxes and profit provision.

What is a loss in insurance?

Loss — (1) The basis of a claim for damages under the terms of a policy. (2) Loss of assets resulting from a pure risk. Broadly categorized, the types of losses of concern to risk managers include personnel loss, property loss, time element loss, and legal liability loss.

How do you calculate loss cost per unit?

The pure loss cost per unit is 10 percent of $400, or $40. The gross premium is calculated by the formula L/[1 - (E + P)], in which L equals the loss cost per unit, E equals the expense ratio, and P equals the profit ratio.