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Burning Cost Formula:
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The Burning Cost Ratio is a key metric in insurance that represents the ratio of ultimate losses to premiums earned, expressed as a percentage. It helps insurers assess the profitability and risk exposure of their insurance portfolios.
The calculator uses the Burning Cost formula:
Where:
Explanation: The burning cost ratio indicates what percentage of premium income is being consumed by claims. A lower ratio indicates better profitability.
Details: Burning cost analysis is crucial for pricing insurance products, setting reserves, evaluating reinsurance needs, and making strategic underwriting decisions. It helps insurers maintain financial stability and competitive pricing.
Tips: Enter ultimate losses and premiums in USD. Both values must be positive numbers, with premiums greater than zero to avoid division by zero errors.
Q1: What is a good burning cost ratio?
A: Generally, a burning cost ratio below 60-70% is considered good, indicating the insurer retains 30-40% of premiums for expenses and profit.
Q2: How does burning cost differ from loss ratio?
A: Burning cost typically refers to the pure claims cost excluding expenses, while loss ratio may include adjustment expenses and other claim-related costs.
Q3: What are ultimate losses?
A: Ultimate losses represent the total amount an insurer expects to pay for all claims, including both paid losses and outstanding loss reserves.
Q4: When is burning cost analysis most useful?
A: It's particularly valuable for pricing reinsurance treaties, evaluating long-tail liability lines, and analyzing portfolio performance over multiple years.
Q5: Can burning cost be negative?
A: No, burning cost cannot be negative as both losses and premiums are positive values. However, it can exceed 100% if losses exceed premiums.