Expected Loss Ratio (E)=1−Expense Provision−Profit MarginExpected Loss Ratio (E) equals 1 minus Expense Provision minus Profit Margin
This article provides a foundational introduction to both pillars, explaining their core principles, methodologies, and why they are the financial bedrock of any solvent P&C insurer. Types of Reserves This article provides an in-depth
Because P&C claims can take years to resolve—especially in liability lines like medical malpractice or workers' compensation—reserves represent the largest liability on an insurer’s balance sheet. Accurate reserving is critical; over-reserving reduces reported profits and ties up capital, while under-reserving can lead to sudden insolvency. Types of Reserves Funds set aside for the costs of settling
This article provides an in-depth introduction to these fundamental concepts, explaining their importance, methodologies, and roles in the insurance business cycle. 1. What is Ratemaking in P&C Insurance? It calculates a necessary percentage adjustment:
Funds set aside for the costs of settling claims, subdivided into Allocated LAE (defense attorney fees, medical exams for specific claims) and Unallocated LAE (claims department rent, adjuster salaries). The Loss Development Triangle
: The portion of the rate allocated strictly to covering actual claims losses and loss adjustment expenses (LAE).
This method modifies existing rates by comparing the actual historical loss performance to an expected baseline. It calculates a necessary percentage adjustment: