Burn cost measured on earned exposure
A loss ratio establishes whether the premium charged was adequate. Burn cost establishes what the risk costs irrespective of what was charged for it, and is therefore the basis on which the following year is priced.
Last updated 12 September 2026
The denominator
Burn cost is incurred claims per life-year, where exposure is earned member-years to the report date. It is not measured against the headcount recorded on the census, nor against the members currently on the portfolio.
The distinction is material. A member joining in October has contributed a quarter of a life-year by January rather than a full year. Dividing by headcount understates the cost of a growing group and overstates that of a contracting one, which is the opposite of the required result in the two cases where the measure matters most.
Because exposure is earned to the report date, changing that date restates the denominator as well as the numerator, and comparisons between dates remain consistent as the portfolio matures.
Comparability across segments
Groups of different sizes, networks operating under different tariffs and age bands with differing utilisation are not comparable on total claims. Measured per life-year they are comparable, which makes burn cost the appropriate measure for segmentation where the question concerns the location of risk rather than the distribution of expenditure.
Burn cost is not additive. The figure for any row is that row's incurred claims over that row's exposure, and margins are recomputed rather than summed, as the sum of two per-member figures is a plausible number without meaning.
Frequency and severity
The same exposure denominator supports claim and claimant counts, so a movement in burn cost can be decomposed into a change in claim frequency or a change in claim severity. A large-loss threshold may be set to separate shock losses from the underlying rate, which distinguishes a genuinely deteriorating group from one that has experienced an exceptional year.
Where a reserve for late-reported claims is set, it is included within incurred claims and therefore within burn cost. Estimated IBNR.
Related pages
Loss ratio analysis · For insurers · For brokers · Extract requirements