Introduction To Ratemaking And Loss Reserving For Property And Casualty Insurance | 2K |

Introduction to Ratemaking and Loss Reserving for Property and Casualty Insurance , authored by Robert L. Brown and W. Scott Lennox

Part I: Foundations of P&C Actuarial Science

Before diving into the specific methodologies, it is essential to understand the environment in which ratemaking and reserving operate. Introduction to Ratemaking and Loss Reserving for Property

Challenges in Loss Reserving

• Long-Tailed Claims: For workers’ compensation or medical malpractice, claims can take 10+ years to close. Estimating payments a decade out is inherently uncertain.
• Inflation & Social Inflation: Economic inflation raises repair costs. “Social inflation” (juries awarding larger verdicts, plaintiff-friendly legal trends) is a newer, harder-to-predict factor.
• Changes in Legal Environment: A new state law extending the statute of limitations can dramatically increase IBNR.

1. Loss Trend: Adjusts for inflation (severity) and frequency changes.

   Gross Premium = (Pure Premium + Expected Loss Adjustment Expenses) / (1 – Expense Provisions – Profit & Contingency Provisions) Loss Trend: Adjusts for inflation (severity) and frequency

   Step D: Expense Loading

   The premium must cover both fixed and variable expenses. plaintiff-friendly legal trends) is a newer