Loss Cost (LC) Metric

A Loss Cost (LC) Metric is a cost metric total amount of money an insurer must pay to cover claims.

• AKA: Pure Premium.
• Context:
  • It can range from being a Historical Loss Cost to being a Prospective Loss Cost.
  • It can (often) include Claims Administration Costs and Claims Investigation Costs.
  • …
• See: Loss Cost Multipliers (LCM), Insurance Policy, Allocated Loss Adjustment Expense (ALAE).

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References

2021

• https://www.irmi.com/term/insurance-definitions/loss-costs
  • QUOTE: Loss Costs — also called “pure premium," the actual or expected cost to an insurer of indemnity payments and allocated loss adjustment expenses (ALAEs). Loss costs do not include overhead costs or profit loadings. Historical loss costs reflect only the costs and ALAEs associated with past claims. Prospective loss costs are estimates of future loss costs, which are derived by trending and developing historical loss costs. Rating organizations such as Insurance Services Organization, Inc. (ISO) (auto liability and general liability), and National Council on Compensation Insurance (NCCI) (workers compensation) develop and publish loss costs. Insurers add their own expense and profit loadings to these loss costs to develop rates. Many insurers will file their own rates or file deviations of the published rates with the states in which they write business.

2020

• https://www.investopedia.com/terms/l/loss-cost.asp
  • QUOTE: 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.
  • Key Takeaways
    • Loss cost is the total amount of money an insurer must pay to cover claims, including costs to administer and investigate such claims.
    • When determining what insurance premium to charge a policyholder, insurance companies factor in the loss cost.
    • Insurance companies make a profit when collected premiums are greater than loss costs.
    • In calculating the loss cost, insurance underwriters use statistical models and historical data from their business and the entire industry.
    • The loss cost multiplier is an adjustment to the loss cost that takes into consideration business expenses and profit.
    • The loss cost multiplied by the loss cost multiplier equals the desirable premium to charge for coverage.
  • …

    The insurance underwriter uses statistical models to estimate the number of losses it expects to incur from claims made against its policies. These models factor in the frequency and severity of claims settled in the past. The models also include the frequency and severity experienced by other insurance companies covering the same types of risk. For underwriting use, the National Council on Compensation Insurance (NCCI) and other rating organizations compile and publish claim information. Despite the sophistication of these models, the results are only estimates. Actual loss associated with a policy can only be known with complete certainty after the policy period expires. ...

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