Loss Constant

A loss constant is a flat charge added to the premiums charged for an insurance policy. It's a fee added to primarily workers comp ins policies.

Insurance companies use a tool called an "experience rating" to estimate how likely it is that an individual policyholder will file a claim. The application comes up a lot in worker's compensation insurance.

The insurance firm will look at a particular client (like a large construction company) and see whether they've produced a higher-than-average number of claims. If so, that client's experience rating would cause them to have a higher insurance rate. It's just a fancy word for taking a business client's history into account.

However, the experience rating only works for larger, established firms. If the insurer doesn't have enough information, there is no way to take into account past experience.

Here's where the loss constant comes into play:

The insurance company gets a client who is too small for an experience rating to have any meaning. So the firm adds in the loss constant. It's a flat amount added to the premium, meant to make up for the fact that these smaller clients often lead to greater-than-average losses (on a dollar-to-dollar basis).

It's sort of like the insurance company shrugs and says "we can't estimate exactly what this company will cost, so we'll just apply a standard, flat fee to give a buffer against uncertainty."