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Frequency

Number of Claims / Number of Exposures

Severity (Average Claim Cost)

Losses / Number of Claims

Pure Premium (Loss Cost)

Losses / Number of Exposures = (Frequency * Severity)

Average Premium

Premium / Number of Exposure

Loss Ratio

Losses / Premium (Pure Premium / Average Premium)

LAE Ratio

Loss Adjustment Expenses / Losses

Underwriting (UW) Expense Ratio

UW Expenses / Premium

Operating Expense Ratio (OER)

UW Expense Ratio + (LAE / Earned Premium)

Combined Ratio

1. Loss Ratio + LAE / Earned Premium + UW Expense / Written Premium

2. Loss Ratio + Operating Expense Ratio (If compare to earned premium rather than to written premium)

Retention Ratio

Number of Policies Renewed / Number of Potential Renewal Policies

Close Ratio

Number of Accepted Quotes / Number of Quotes

Price

Cost + Profit

Premium

Losses + LAE + UW Expenses + UW Profit

LAE

ALAE + ULAE

allocated loss adjustment expenses (ALAE)

are claim-related expenses that are directly attributable to a specific claim; for example, fees associated with outside legal counsel hired to defend a claim can be directly assigned to a specific claim.

unallocated loss adjustment expenses (ULAE)

are claim-related expenses that cannot be directly assigned to a specific claim. For example, salaries of claims department personnel are not readily assignable to a specific claim and are categorized as ULAE

Underwriting Expenses

• Commissions and brokerage (are amounts paid to insurance agents or brokers as compensation for generating business)

• Other acquisition (are expenses other than commissions and brokerage expenses paid to acquire business)

• General (include the remaining expenses associated with the insurance operations and any other miscellaneous costs. For example, this category includes costs associated with the general upkeep of the home office)

• Taxes, licenses, and fees (include all taxes and miscellaneous fees paid by the insurer excluding federal income taxes. Premium taxes and licensing fees are examples of items included in this category)

Underwriting Profit

The company must support this risk by maintaining capital, and this entitles it to a reasonable expected return (profit) on that capital. The two main sources of profit for insurance companies are underwriting profit and investment income. Underwriting profit, or operating income, is the sum of the profits generated from the individual policies and is akin to the profit as defined in most other industries (i.e., income minus outgo). Investment income is the income generated by investing funds held by the insurance company

Premium

Losses + LAE + UW Expenses + UW Profit.

Reported Losses

paid losses + case reserve

Premium

is the amount the insured pays for insurance converge

Claim

An insurance policy involves the insured paying money ( premium ) to an insurer in exchange of a promise to indemnify the insured for the financial consequences of an events covered by the policy

incurred but not reported (IBNR) claims

Claims not currently known by the insurer

Loss

is the amount of compensation paid or payable to the claimant under the terms of the insurance policy

incurred but not enough reported (IBNER) reserve

is the difference between the amount estimated to ultimately settle these reported claims and the aggregate reported losses at the time the losses are evaluated

Estimated Ultimate Losses

Reported Losses + IBNR Reserve + IBNER Reserves