Understanding Adjustments for Large Losses in Property and

School: University of Nebraska, Lincoln - Course: ACTS 475 - Subject: Accounting

Property and Casualty Insurance - Credibility and Large Losses CHASE WURDEMAN - ALLSTATE INSURANCE COMPANY *All examples are fictional and do not represent real data

Indication Review  "Average indicated premiumisaverage future losses andaverage future fixed expensesgrossed upfor variable expensesandthe target profit provision."R= Required Premium = Expected Future Losses q= Target ProfitF= Fixed Expenses (don't vary withpremium) e.x. Salaries of home office employees v= Variable Expenses (vary withpremium) e.x. agent commissions as a percent ofrequired premium

Credibility Review Z represents the amount of credibility given to body of data Square Root Rule for Partial Credibility: Z =  Credibility weighted estimate is calculated as Z * (Observed Estimate) + (1-Z) * (Complement) Z = = 45%

Large Losses HOW DO WE ADJUST OUR DATA TO ACCOUNT FOR THEM?

Why Must We Adjust for Large Losses?  Depending on the size of the book, an actuary will typically use between one and five years of data to estimate expected annual loss Question:  What happens with a loss that occurs every sixth or seventh year? How do you account for this loss in your projection of average loss? Remember, a rate is the expected value of futurecosts