What is the Burning-Cost Ratio?

A burning-cost ratio is the estimation or calculation of excess losses/cost of claims that are more than the total subject premiums collected. It is a rating method commonly used in the insurance industry, this ratio determines the rates of tragic loss insurance policies that insurers buy to protect themselves but is more than the total premiums they collected.

How Does the Burning-Cost Ratio Work?

One of the simplest ways to figure out costs is using the burning-cost ratio. This ratio is an estimation of excess losses to a policy, this is often based on the average of losses in previous years. The calculation of burning-cost ratio is likened to a statistical calculation known as ratio estimation. How effective or accurate a burning-cost ratio would be is largely dependent on the accuracy of the amount of claims data. The burning-cost ratio is based on aggregate losses. However, this estimation is arrived at when certain amendments is made to past date so as to make them relevant to the present situation. Burning-cost ratio and policies are becoming more popular as many companies use them for employees compensation insurance. The actual claims of a company for a period of time which must be a relevant period is important in setting final amounts for premiums for workers compensation. Due to the significant benefits attributed to the use of burning-cost policies, many companies avoid the use of a conventionally priced premium. Burning-cost pricing offer financial incentives to companies that use it for workers compensation policy. However, burning-cost pricing can be adversely affected by unforeseen claims costs, it also carries higher risks than its conventional counterparts.