When insurance carriers are calculating premium rates to charge, they need to deep dive into the loss history of a particular class of business. Specifically, they look at historical incurred costs, which the International Risk Management Institute (IRMI) calls “pure premium,” also known as loss costs.
Loss costs start with the sum of actual or expected money insurers pay for claims in a class of business. Then, the settlement figure itself as well as operating and investigation expenses are factored into this amount. To put it simply, loss costs are the aggregate cost needed to pay strictly for the cost of claims.
In the traditional insurance marketplace, insurance companies also consider their own overhead and profit when developing premium rates. This is called the loss cost multiplier. That means the final premium rate given to an insured in this space is:
Loss cost X the insurance company’s loss cost multiplier
In the alternative insurance marketplace, group captives allow member organizations to operate as their own insurance company. One of the most valuable elements of belonging to a group captive means your premium is based only on your company’s own loss experience. You don’t have other organizations’ losses influencing your premium rate. You also don’t have to account for paying an insurance company’s overhead, such as paying for their payroll, taxes, rent, etc. It’s one of the first ways organizations realize savings upon joining a member-owned captive.
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