Which rating method is based on historical aggregate losses without including provisions for profit?

The loss costs rating method relies on historical aggregate losses to determine premiums without including any provisions for profits. This approach focuses solely on the expected losses incurred from claims over a specific period in the past, providing a clear view of the risks associated with a particular insurance policy.

In this method, insurers evaluate the amount of money that has historically been spent on claims for similar coverage, and use that data to set rates. Since it does not factor in any profit margin or administrative costs, the rates calculated under this method are often lower than those derived from other methods that do include these additional costs. This makes loss costs rating particularly valuable for insurers looking to offer competitive pricing based solely on the risk of loss.

Other rating methods, such as profit rating, include provisions for profit as well as possible losses, which leads to higher premium costs. Components rating considers various factors that might affect pricing, such as operational expenses or profit margins, rather than just historical loss data. Provision rating entails setting aside funds to cover future losses, which again goes beyond simply considering past loss experiences. Therefore, loss costs rating stands out as the most direct method focused only on historical claims data without profit considerations.