The traditional explanation is that scouse is a contraction of 'lobscouse', which was a type of stew (Norwegian in origin), once popular among sailors, and is still eaten in Liverpool today.
As to whether it's insulting, you could call me paranoid, but any mention of my home town seems intended as an insult these days. People from Liverpool do call themselves Scousers though.
If, like me, you come from the blue half of town you don't refer to yourself as a Liverpudlian (which carries an entirely different connotation).
People in Liverpool are called scousers, and the word comes from "Scouse",a meal made by poor people in Liverpool in the late 19th century and the first half of the 20th century.
The word "scouse" has been shortened and it comes from the word "lobscouse" which is a traditional dish made with lamb stew and eaten by the sailors in the Liverpool region. The original word is German "Labskaus".
"Labskaus" (in Norwegian "lapskaus") is a very common dish also in Scandinavia. I once heard that the word "scouse" actually derives from the Norwegian use of the word. But this may be a myth.
In Norway, which had a long sea-trading association with the Northern English seaports, the dish (known locally as lapskaus) is virtually a national dish using the weekend's remaining food, usually carrots, potatoes, pork sausages in slices or beef cut small and served with flatbrød (unleavened bread dating back to Viking days)
Scouse -- 1840, short for lobscouse "a sailor's stew made of meat, vegetables, and hardtack," of uncertain origin (cf. loblolly); transf. sense of "native or inhabitant of Liverpool" is recorded from 1945. In ref to the regional dialect, from 1963.
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