The burning cost ratio (also often called loss ratio in many markets) compares incurred losses to earned premium over a period.
Calculation
Burning cost ratio is commonly expressed as:
Burning Cost Ratio = Incurred Losses / Earned Premium
Higher ratios indicate stronger claim pressure and can signal stricter pricing, underwriting controls, or contract repricing.
How underwriters use it
Actuaries and underwriters use the ratio to compare segments, assess profitability, and decide whether retention levels are appropriate. Sudden shifts often prompt reinsurance review, underwriting guideline changes, or rate filings.
Claims and reserving relationship
In reserve planning, stable burning-cost assumptions help align reserving policy with expected future claim costs. Distorted data or short-duration views can produce false comfort and underpricing.
Practical example
If an insurer earns $12 million and incurs $9.6 million in claims, the burning cost is 80%. A large jump from 60% may trigger tighter terms or higher deductibles on that class.