B. Policy Year 1. Any claim action arising on a policy that became effective in policy year Z is accounted for in the "policy year Z”file. 2. If policy year z goes from Jan .1, Z to DeC 31, Z, and if all policies are effective for one year the exposure period for policy year z goes from Jan. 1, Z to Dec. 31 Z+1(i.e. 24 months) 3. If all issue dates and accidents are uniformly distributed the midpoint of PY(z)is Dec 31, Z or Jan. 1, Z+1 4. Thus, you do not have complete PY(z)data until Dec 31 Z+1(and then it is still immature) 5. However, pricing is done for policy years, so having policy year data is a consistent basis 11
11 B. Policy Year 1. Any claim action arising on a policy that became effective in policy year Z is accounted for in the “policy year Z” file. 2. If policy year Z goes from Jan. 1, Z to Dec. 31, Z, and if all policies are effective for one year, the exposure period for policy year Z goes from Jan. 1, Z to Dec. 31, Z+1 (i.e. 24 months). 3. If all issue dates and accidents are uniformly distributed, the midpoint of PY(Z) is Dec. 31, Z or Jan. 1, Z+1. 4. Thus, you do not have complete PY(Z) data until Dec. 31, Z+1 (and then it is still immature). 5. However, pricing is done for policy years, so having policy year data is a consistent basis
C. Calendar Year 1. Any accounting action on a file in calendar year Z gets recorded in the“ calendar year” z fille. 2. Calendar year Z is complete and mature as at Dec. 31, Z 3. Incurred losses(z)=paid losses(z)+A Reserve(z) Paid losses(z)+ Loss reserve 12/31/z - Loss reserve 12/31/Z-1. 4. This system is not widely used as one cannot allocate calendar year"action to any defined exposure period Note: Again, The REPORT YEAR, used for claims-made liability policies, is not discussed in the text
12 C. Calendar Year 1. Any accounting action on a file in calendar year Z gets recorded in the “calendar year” Z file. 2. Calendar year Z is complete and mature as at Dec. 31, Z. 3. Incurred losses (Z) = Paid losses (Z) + Reserve (Z) = Paid losses (Z) + Loss Reserve 12/31/Z - Loss Reserve 12/31/Z-1. 4. This system is not widely used as one cannot allocate “calendar year” action to any defined exposure period. Note: Again, The REPORT YEAR, used for claims-made liability policies, is not discussed in the text
ⅣV. The premium data Written premium vs Earned Premium Premium data usually come as“ written” premiums(cash accounting"earned premiums(accrual accounting) a. If $120 received oct. 15, Z, then written premium in Z is $120, but earned premium is $25 for Z b. The remaining $95 is unearned premium in Z, and will only be earned in year Z+1 13
13 a. If $120 received Oct. 15, Z, then written premium in Z is $120, but earned premium is $25 for Z. b. The remaining $95 is unearned premium in Z, and will only be earned in year Z+1. IV. The Premium Data Written Premium vs. Earned Premium: Premium data usually come as “written” premiums (cash accounting) or “earned” premiums (accrual accounting)
Question: The XYz Insurance Company had an unearned premium reserve of $20 million at the end of 2015. during 2016 it wrote $25 million in annual premiums. At the end of 2016, its unearned premium reserve was $23 million. What were earned premiums during 2016? 14
14 ◼ The XYZ Insurance Company had an unearned premium reserve of $20 million at the end of 2015. During 2016 it wrote $25 million in annual premiums. At the end of 2016, its unearned premium reserve was $23 million. What were earned premiums during 2016? Question:
V. The Exposure Unit 1. Premium =(rate)*(exposure units) (e.g. for W.C.= $100 of payroll 2. A good exposure base should: a. be an accurate measure of quantitative exposure to risk b. be easy for l C to determine(at time of premium calculation) C. not to be subject to manipulation by ph d. be easy to record and admin
15 V. The Exposure Unit 1. Premium = (rate) * (exposure units) (e.g. for W.C. $100 of payroll) 2. A good exposure base should: a. be an accurate measure of quantitative exposure to risk b. be easy for I.C. to determine (at time of premium calculation) c. not to be subject to manipulation by ph d. be easy to record and admin