Aggregate Loss Retentions and Changing Exposures

Lori Ussery, Actuarial Consultant

As we approach year end, many companies are finalizing details for their 2023 policy renewal. Such policies may include annual aggregate limits (or retentions) on losses retained as part of a company’s self-insured retention (SIR) or deductible. While the per-occurrence retention places a cap on the amount a company retains per claim, the aggregate retention places a cap on the annual amount a company retains for all claims covered during the policy year within the per-occurrence retention.

The aggregate retention is set at an amount high enough that losses are not likely to exceed the aggregate retention in most years. It is intended to provide protection for the insured against adverse years, such as those with several maximum or near-maximum claims or a higher overall volume of reported incidents.

A confidence level analysis, often included in SIGMA’s loss projection reports, is a useful tool for determining the reasonability of the aggregate retention. In the following example, a company’s 2023 loss projection is $1,740,000 for losses within their SIR. The SIR specified in their policy is $500,000 per occurrence and $2,750,000 aggregate. The confidence level analysis from their recent actuarial report indicates that 85% of the time losses are anticipated to be below $2,750,000.

Example 1

2023 Aggregate Loss Probability Distribution
(Losses are Limited to $500,000 per Occurrence and $2,750,000 Aggregate)

Aggregate Loss Probability Aggregate Loss Distribution  Risk Margin
Expected $1,740,000 100%
50% $1,650,000 95%
55% $1,760,000 101%
60% $1,870,000 107%
65% $2,000,000 115%
70% $2,140,000 123%
75% $2,310,000 133%
80% $2,510,000 144%
85% $2,750,000 158%
90% $2,750,000 158%

A company’s unique claims experience has the most direct impact on the selection of the aggregate retention. If a company’s loss experience deteriorates for multiple policy years, the insurer will often increase the aggregate retention. Additionally, insurers should increase the aggregate retention proportionally as exposure increases, as by definition exposures should be proportional to loss.

Over the past few years many companies have experienced drastic changes in exposures. These changes may have been driven by normal changes in business operations or the result of rebounding from the pandemic. As these exposures increase or decrease, losses should increase or decrease proportionally. During such periods of significant growth or decline, aggregate retention levels should be reviewed closely.

In SIGMA’s actuarial reports, the methodology most commonly used to project losses involves limiting loss experience for historical years to the projected retention level, developing and trending the limited losses to ultimate values at the current cost level, and dividing trended losses by trended exposures to calculate historical pure loss rates, as shown in Example 2. These pure loss rates form the basis to select a pure loss rate used to project losses for the upcoming policy year.

Example 2

Calculation of 2023 Projected Losses
(Losses are Limited to $500,000 per Occurrence)

Period Start Trended Losses Trended Payroll Pure Loss Rate (Per $100 Trended Payroll)
01/01/13 $2,110,000 $63,950,000 $3.30
01/01/14 $1,230,000 $65,680,000 $1.87
01/01/15 $1,200,000 $67,650,000 $1.77
01/01/16 $770,000 $70,430,000 $1.10
01/01/17  $230,000 $71,880,000 $0.32
01/01/18  $630,000 $73,730,000  $0.85
01/01/19  $2,230,000 $76,990,000  $2.90
01/01/20 $1,050,000  $79,220,000  $1.32
01/01/21  $1,790,000  $88,730,000  $2.02
01/01/22 $1,630,000 $102,040,000 $1.59
Total $12,870,000 $760,300,000 $1.69
Average = $1.70
Selected Pure Loss Rate = $1.70
2023 Projected Payroll = $110,000,000
2023 Projected Losses = $1,870,000

Based on this example, one might select $1.70 for the 2023 projected pure loss rate at the SIRs noted in Example 1. The 10-year average of historical pure loss rates is $1.70, and no year exceeds $2,750,000 in aggregate. However, note that payroll has increased over the years and is projected to be $110,000,000 in 2023. This implies that the projected pure loss rate for losses within the SIR cannot exceed $2.50 per $100 payroll (that is, $2.75M aggregate losses divided by $110M payroll). Two historical pure loss rates have exceeded $2.50. After capping these two pure loss rates, the historical average is now $1.58 per $100 payroll. This leads us to select a lower pure loss rate of $1.58 and projected losses of $1,740,000.

Average of Pure Loss Rates Capped at $2.50 = $1.58
Selected Pure Loss Rate = $1.58
2023 Projected Payroll = $110,000,000
2023 Projected Losses = $1,740,000

Similar to overall exposure growth or decline, a change in the mix of employee class codes, business operations, geographical area, and other exposure-related changes may affect a company’s exposure to loss and the level of their aggregate retention. It is important to disclose this type of information to your actuary when providing loss, exposure and policy data for an actuarial loss projection analysis, as special adjustments may be needed.

If you would like more information on this topic, please contact us at or schedule a call with one of our consulting actuaries.

© SIGMA Actuarial Consulting Group, Inc.

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