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
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    Learn about the loss ratio and combined ratio, what the two ratios measure and the main difference between the loss ratio ... Read Answer >>
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    Understand why an investor needs to look at the burn rate of companies in the Internet sector. Learn what a burn rate is ... 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 >>
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