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📈 '''Loss rating''' is a [[Definition:Pricing | pricing]] methodology in insurance that bases the [[Definition:Premium | premium]] for a risk primarily on that risk's own historical [[Definition:Loss experience | loss experience]] rather than relying solely on manual class rates or industry-wide benchmarks. Widely used in [[Definition:Commercial insurance | commercial]] and [[Definition:Reinsurance | reinsurance]] markets, this approach treats the insured's track record of [[Definition:Claim | claims]] frequency and severity as the most reliable predictor of future losses — a logic that works best when the insured generates enough exposure volume and claims data to be statistically credible on its own.

⚙️ Under a loss-rating approach, the [[Definition:Actuary | actuary]] or [[Definition:Underwriter | underwriter]] compiles multiple years of the account's loss history, adjusts each year for [[Definition:Loss development | loss development]] to bring immature years to an [[Definition:Ultimate loss | ultimate]] basis, and applies [[Definition:Loss trend | trend]] factors to account for inflation, legal environment shifts, and other systemic movements. The resulting developed and trended losses are then divided by the corresponding [[Definition:Exposure unit | exposure]] or earned premium base to derive an indicated rate or [[Definition:Loss ratio | loss ratio]]. Expense and [[Definition:Profit loading | profit]] loads are added to arrive at the final premium indication. The method is standard for large commercial accounts in the United States and is equally prevalent in London market and Continental European placements, particularly for [[Definition:Excess of loss reinsurance | excess-of-loss]] and large-deductible programs. A key refinement involves [[Definition:Credibility | credibility weighting]]: when an account's own data is not fully credible, the actuary blends it with broader class or industry benchmarks, assigning greater weight to the account's own experience as its volume and years of data increase.

💡 The appeal of loss rating lies in its direct alignment of price with demonstrated risk quality, creating a powerful incentive for policyholders to invest in [[Definition:Loss control survey | loss control]] and [[Definition:Risk management | risk management]]. Accounts that reduce claims see the benefit reflected in lower premiums at renewal, while deteriorating accounts face corrective rate action grounded in objective data rather than subjective judgment alone. However, the approach carries pitfalls: small sample sizes can make results volatile, a single large loss can distort the picture, and historical experience may not capture emerging exposures such as [[Definition:Cyber risk | cyber risk]] or shifting [[Definition:Social inflation | social inflation]] trends. For these reasons, experienced practitioners treat loss rating as one component of a broader pricing toolkit — complementing it with [[Definition:Exposure rating | exposure rating]], [[Definition:Catastrophe model | catastrophe modeling]], and market benchmarking to arrive at a well-rounded view of the risk.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Experience rating]]
* [[Definition:Exposure rating]]
* [[Definition:Credibility]]
* [[Definition:Loss development]]
* [[Definition:Ratemaking]]
* [[Definition:Loss ratio]]
{{Div col end}}

Definition:Loss rating - Revision history

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