The Analytically Based, Data Driven Broker- Trending, Pure Loss Rates, and Loss Projections

Timothy L. Coomer, Ph.D.

Blog 1: Intro to SIGMA & Scope and Data Requirements
Blog 2: Loss Development Factors
Blog 3: Reserve and Cash Flow Analyses
Blog 4: Trending, Pure Loss Rates, and Loss Projections
Blog 5: Confidence Interval and Retention Level Analyses
Blog 6: Loss Cost Analysis

So, we’ve covered the most popular of SIGMA’s offerings, but what about those catered to more specific needs? For example, an organization may be comfortable with the cost of their current liabilities, but what if they need to know what to expect cost-wise from their future liabilities? In this case, loss projections are the answer. Typically, loss projections are embedded into reserve analyses, but they are occasionally considered on their own. Let’s take a moment to discuss what exactly loss projections accomplish, and how one might use them.

Where reserve analyses attempt to estimate the total cost of liabilities up to a specific evaluation date, loss projections attempt to predict future liabilities for a set period of time. Generally, actuaries consider two sets of data: historical loss activity and exposure to risk.

Similar to reserve analyses, estimated ultimate losses are calculated for each policy year. Once this is done, inflation trend factors are applied to these estimates in order to more accurately reflect the expected cost level for the period being projected. For workers compensation, these factors include changes in benefit levels attributable to changes in state workers compensation laws and changes in medical and indemnity or wage costs. For liability coverages, inflation trend factors are based on changes in loss costs over time.

The next step is to adjust historical exposures to the expected level for the projected year. For workers compensation, the most common exposure base is payroll. Other lines of coverage, such as general liability or automobile liability, may use revenue or vehicle counts. Inflation-sensitive exposures, such as payroll and revenue, are adjusted to projected levels. No adjustment is needed for non-inflationary exposures, like vehicle counts.

Then, trended ultimate loss estimates are divided by trended exposures in order to calculate pure loss rates. The pure loss rate can be defined as the expected dollar loss cost per unit of exposure. Each historical pure loss rate is an estimate of the pure loss rate which could be charged for the projected period.

Historical averages are used to select a pure loss rate for the projected year. Subjective information pertaining to changes in business operations, safety programs, new product or manufacturing techniques, or other pertinent conditions, may be considered along with historical trends in selecting the projected pure loss rate. Additionally, historical pure loss rates may be compared to benchmark indications when sufficient historical data is not available.

The selected pure loss rate is then multiplied by the projected exposure to forecast losses for the projected year. This loss pick may be considered when funding a self-insured program for the upcoming year, determining appropriate premiums, negotiating letters of credit, and other loss financing decisions. Discounted loss projections reflecting potential investment income may be considered in the decision-making process.

If you find yourself wanting to learn a bit more about loss projections and how they work, including an alternate “loss cost” method of calculation, we’ve provided below a list of documents and videos from our own RISK66 library that should allow you to do so.

Note: the following links require a login to Register for free educational access.

PDF Resources:

  • Actuarial Analysis Map - This diagram helps explain the flow of data and computation necessary for a loss projection and reserve analysis.
  • Loss Pick Snapshot - A brief definition and description of a "loss pick" or loss projection and how it is utilized by risk management professionals.
  • Forecasting Losses TechTalk - A detailed article on projecting losses for the coming policy period, one of the key values necessary for risk management decision making.

Video Resources:

  • Projecting Losses with an Incomplete Loss History - This video explains techniques an actuary may use when projecting losses with an incomplete loss history.
  • Analysis Methods - This video explains the six analysis methods commonly used by actuaries. The video also looks at the advantages and disadvantages of each method.
  • Bornhuetter-Ferguson Method - This video takes an in-depth look at how an actuary might use the Bornhuetter-Ferguson method to calculate an Ultimate Loss Projection. The video discusses the benefits and disadvantages of this method and it steps though a Bornheutter-Ferguson calculation.
  • Glossary of Terms for a Loss Projection - This 8 minute videos covers the key terms related to a Loss Projection. Including, Evaluation Date, types of losses, aggregate limits, and much more.
  • Exposures - This 10 minute video explores what exposures are used for in an actuarial analysis.

As always, feel free to contact us with any further questions, and we’d be more than happy to discuss them. We hope you’ve been enjoying the chance to learn a bit more about SIGMA’s offerings. We’ll return next month by delving into more nuanced applications of the loss projection: confidence interval and retention level analyses.

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