loss cost

When a builder quotes a job, there is the raw cost of materials and labour, and then the markup. Insurance has the same split. The loss cost is the raw-materials part of an insurance price: the expected cost of claims, plus the cost of handling those claims, for one unit of exposure — before any company adds its own overhead, commissions, and profit.

Loss cost is very close to pure premium; the usual distinction is that loss cost includes loss adjustment expense (the cost of investigating and settling claims) while a bare pure premium may not. So loss cost = expected losses plus loss adjustment expense, all divided by exposures. For example, if expected losses are 300 dollars per car-year and claim-handling adds 30 dollars, the loss cost is 330 dollars per car-year. The term matters most because of advisory organizations: in many markets a rating bureau (such as ISO in the United States) collects industry data and publishes prospective loss costs, and each insurer then multiplies that by its own loss-cost multiplier to reflect its expenses and profit.

This division of labour — a bureau supplies the loss cost, the insurer supplies the markup — is why the loss cost is a building block, not a final price. It lets small insurers price lines they could never credibly study alone, while keeping each company's expense and profit choices its own. The risk is that everyone leans on the same bureau number, so a flawed industry loss cost can push a whole market off in the same wrong direction.