Burning Cost Ratio

DEFINITION of 'Burning Cost Ratio'

An insurance-industry calculation of excess losses divided by total subject premium. The burning cost ratio is an experience-based insurance-rating method commonly used in determining rates for excess of loss reinsurance, or the insurance that insurance companies buy to protect themselves against total claims that exceed their total premiums collected.

BREAKING DOWN 'Burning Cost Ratio'

This method is strongly related to a type of statistics called ratio estimation.Calculation of the burning cost ratio is one of several rating methods and is simple and widely used, but requires lots of claims data for it to be accurate. Another type of experience-based insurance-rating method is the Monte Carlo simulation.

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RELATED FAQS
  1. What is the expense ratio in the insurance industry?

    Learn about the expense ratio for insurance companies and the different methods of calculating it. The expense ratio is a ... Read Answer >>
  2. What is reinsurance?

    Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit ... Read Answer >>
  3. How do I calculate the combined ratio?

    Learn about the combined ratio and how it is calculated under a financial basis and a trade basis using the loss ratio and ... Read Answer >>
  4. How is my insurance premium calculated?

    An insurance premium is the money charged by insurance companies for coverage. Insurance premiums for services differ from ... Read Answer >>
  5. What is the minimum number of simulations that should be run in Monte Carlo Value ...

    Find out how many simulations should be run at minimum for an accurate value at risk when using the Monte Carlo method of ... Read Answer >>
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