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What Is a Burning Ratio?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 December 2016
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    Conjecture Corporation
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The burning ratio is a term that is often used to describe the amount of losses that are incurred when insured goods are destroyed in comparison to the amount of insurance protection that was secured for those goods. The reference to burning has to do with the most common application of this term, meaning the value of goods destroyed in some sort of inferno versus the amount of insurance that was carried on those goods at the time of the fire. This type of ratio is very helpful in assisting individuals and businesses in determining how much insurance coverage should be secured and maintained in order to adequately cover the total loss of the goods in question.

It is important to note that a burning ratio is not the same as a loss ratio. With a loss ratio, the focus is on the total amount of loss sustained in comparison with the premiums that have been paid into the policy. With a burning ratio, the premiums are not addressed at all. Instead, the focus is on the total amount of coverage provided in return for making those premium payments, and comparing that amount of coverage to the actual losses that could take place when and if an event cited in the terms and conditions of the policy should come to pass.

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One of the benefits of understanding the burning ratio is that consumers have the opportunity to make sure they have an equitable amount of insurance protection should some catastrophic event occur that destroys the insured items. For example, a homeowner would want to make sure the fire insurance portion of the homeowners protection plan provided enough benefits to help the household recover if a fire were to destroy the home and all the belongings within the house. By comparing the potential loss with the amount of the coverage, it is possible to decide if a given amount of coverage is sufficient based on current replacement costs, or if the amount of coverage should be increased.

Insurance companies can also use the burning ratio to place limits on the amount of coverage they are willing to extend to a given client, often based on factors such as the location of the home or commercial building, the market value of the property, and the actual uses for the property. As a means of limiting risk, the insurance provider may only offer up to a certain amount of coverage that may or may not equal the amount desired by the client. When this is the case, shopping around and comparing offerings with different insurance providers is often a good idea, and may result in securing a level of coverage that is more attractive to the property owner.

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