Loss Conversion Factor

What Does Loss Conversion Factor Mean?

The loss conversion factor is a variable that is used in retrospecting rating. When an insurance company adjusts premiums based on losses incurred, loss conversion factors are added to losses incurred to get a better understanding of the exact amount of money they lose with a particular policy.

Insuranceopedia Explains Loss Conversion Factor

Essentially, loss conversion factors are just factors that assist insurance companies when they are trying to solve mathematical problems related to their liabilities and expenses. These factors are typically used by actuaries, who are trained to perform complex mathematical calculations.

Depending on the results of equations that factor in loss conversion factors, insurers may adjust their premium prices. If losses are too high, premiums may be raised; if they are low, premiums may be lowered.