The Analytically Based – Data Driven Broker: Loss Cost Analysis

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

Our prior blog post dealt with confidence intervals and retention level analyses, both of which rely heavily on loss projections. To produce these analyses, an actuary must examine historical, contextualized losses from a credible database, but what happens when organizations or divisions with workers compensation policies either don’t have access to that data, or have very limited claim frequency?

In those cases, an actuary will offer what is known as a loss cost analysis, which combines industrial information with an organization’s exposure to risk to arrive at a credible loss projection.

Exposures, which we touched on in an earlier post, are amounts that indicate vulnerability to risk in a given industry. Typically, these range from sales figures to vehicle amounts to payroll, but due to the nature of the loss cost analysis, payroll amounts are required. Specifically, payroll amounts must be segmented by class code and accompanied by a few extra inputs (such as the state each segment is based in), which allows the actuary to further contextualize the risk they present based on industry data. Based on this context, a credible pure loss rate is applied to each segment to create a number of individual loss projections, and then each segment’s loss projection is summed to create a total projection for the entity.

One of the aforementioned inputs needed to determine a pure loss rate is the policy period’s retention level, meaning SIGMA can also provide retention level analyses without utilizing loss data, which is especially useful for newly created organizations, recent acquisitions, or brand new divisions.

Since the loss cost analysis requires non-typical input data, it can be difficult to ensure that the data provided is fully representative of an organization. In situations where this is a possibility, SIGMA is always available to discuss precisely what is needed and provide advice on the best methods of gathering it.

If loss cost analyses are of special interest to you now, or may be in the future, we’d like to provide some documentation describing it in greater detail. Below, links to relevant RISK66 documents and videos are available at your convenience.
PDF Resources

  • Exposures Snapshot - A brief summary about exposure data and how actuaries use this to measure type and scope of risk.

Video Resources

  • Exposures - This 10 minute about exposures explain how actuaries use them to determine an organization's vulnerability for risk.

We very much appreciate you taking the time to join us in examining SIGMA’s many offerings. As SIGMA continues to grow, so too does our sphere of expertise. Thus, we’d like to take just a little time to discuss forthcoming ways in which SIGMA can help you.

As you may have noticed through our previous blog posts, there are currently a number of educational resources available from RISK66, ranging from graphics to manuals to walkthrough videos. We are continuously expanding these libraries, and will soon be including an option to further assist in the educational process via onsite training. We’re very excited to be offering this new range of material and would love to know if and how it would benefit you. At your convenience, feel free to schedule a time to talk with a representative from SIGMA who would be happy to go through your specific needs and see how our resources, existing or forthcoming, can help.

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