Loss Cost
Also known as: pure premium, advisory loss cost, expected loss cost
A loss cost — also called the pure premium — is the pure expected claims cost for a class of risk, stated per unit of exposure (per $100 of payroll for workers' comp, per $1,000 of sales for some liability classes). It is the raw actuarial cost of claims only; it does not include the carrier's overhead, commissions, or profit.
For workers' comp, the NCCI (or an independent state bureau) files an advisory loss cost for every class code. Each carrier then applies its own loss-cost multiplier (LCM) to convert the loss cost into a chargeable rate: manual rate = loss cost × LCM. So two carriers writing the same class in the same state start from the identical loss cost but charge different rates because their LCMs differ.
Loss costs are public, regulator-held data — which is why we can publish real filed WC loss costs by state (see our WC loss-cost study and the state rate hubs). Note the difference from a loss ratio: a loss cost is a forward-looking filed input per class; a loss ratio is a backward-looking result on total premium.
Real-world scenario
Summit Ridge Roofing, a 14-employee commercial roofing contractor in a competitive-rating state, is renewing its workers' compensation policy. Its payroll for the roofing class (NCCI class code 5551) is $850,000. The rating bureau's published loss cost for that class is $12.50 per $100 of payroll — the pure cost of expected claims and loss-adjustment expense, with no insurer markup baked in. So the raw loss-cost figure is 8,500 units × $12.50 = $106,250.
That is not what Summit Ridge pays. The insurer applies its own loss cost multiplier of 1.45 to fold in overhead, commissions, taxes, and profit, taking the manual figure to $154,062. Summit Ridge's favorable experience modifier of 0.88 then trims it to about $135,575, and a $10,000 safety-program credit brings the deposit premium to roughly $125,575. A competitor's carrier, using a 1.62 multiplier and a 1.10 mod, would have quoted the same account near $189,338 — same loss cost, very different price.
The loss cost also proves its worth after a claim. When a Summit Ridge crew member falls and shatters an ankle, the file runs $68,000 in medical, $41,000 in indemnity wage benefits, and $7,500 in adjusting costs — a $116,500 incurred loss. Multiply that experience across every 5551 employer in the state and you get why the bureau set the loss cost at $12.50 rather than $9.00: it is the aggregated, credibility-weighted price of risk before any single carrier adds a dime.
How it affects your premium
A loss cost is not something you buy directly, but the figure that drives your premium moves with several data-driven inputs the rating bureau weighs when it files the number for your class:
- Statewide claim frequency and severity — the count and size of injuries reported for the class code; more and costlier claims push the loss cost up.
- Loss development factors — bureaus mature immature claim data toward its ultimate loss value, so open claims that are still growing inflate the filed loss cost.
- Class credibility — how much statistical weight the class's own experience carries versus blended data; the credibility factor determines whether one bad year swings the number.
- Medical and wage inflation trend — projected increases in treatment costs and indemnity benefits between the data period and the policy period.
- Loss-adjustment expense loading — the cost of investigating and settling claims, which is added to pure losses to reach the filed loss cost.
- Benefit-level and regulatory changes — statutory changes to benefits or fee schedules approved by the state department of insurance that raise or lower expected payouts.
- Exposure base shifts — reclassification or payroll audits that change how much exposure sits in the class, indirectly affecting the credibility of the filed loss cost.
Common misconceptions
Myth: The loss cost is the price I'll pay for my policy.
Reality:
No. Loss cost is only the expected-claims component; each carrier multiplies it by its own loss cost multiplier to cover expenses and profit, so your actual premium is meaningfully higher than the raw loss cost.
Myth: Every insurer charges the same because they start from the same loss cost.
Reality:
They start from the same bureau loss cost but apply different multipliers, schedule credits, and your own experience modifier — so two carriers can quote the identical account thousands of dollars apart.
Myth: Loss cost and rate mean the same thing.
Reality:
Not in a loss-cost state. The bureau files the loss cost; the individual carrier files a multiplier that converts it into the final rate. The rate is loss cost plus the insurer's loading.
Frequently asked questions
Where does the loss cost number come from?
It is published by a rate service organization such as NCCI or an independent state bureau, which aggregates statewide claim data by class code and files the result with the state department of insurance.
How is loss cost different from pure premium?
They are closely related: pure premium is the expected loss per unit of exposure, and the filed loss cost is essentially that pure premium plus loss-adjustment expense, expressed per $100 of payroll or other exposure base.
Can I lower my loss cost?
Not directly — the loss cost is set for your whole class. What you can influence is your own experience modifier and any schedule credits, which the carrier applies on top of the loss cost.
Do all states use loss costs?
Most competitive-rating states do, but a few administered-pricing states and monopolistic states set final rates directly instead of publishing loss costs for carriers to mark up.
Why did my premium rise when my claims stayed the same?
Bureaus revise loss costs for the whole class based on statewide trend and loss development, so a class-wide increase can raise your premium even if your own loss run is clean.
Sources cited
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