The expected claim method is usually used by Insurers when entering new lines of business or new territories.
Common Uses of the Expected Claims Method
This method is more commonly used in lines of business with longer emergency patterns ad settlements like Medical Negligence, Workmen compensations, Product liability, etc.
This method can be used with data organized by
- Accident year
- Report year
- Policy year
- Underwriting year, and even with calendar year data
The expected claim method is often and commonly used when:
- An insurance company enters a new line of business or a new territory
- Operational or environmental changes make recent historical data irrelevant for projecting future claims activity for that group of claims
- Data is unavailable for other methods
Mechanics of the Expected claims Technique
There is numerous way for actuaries to determine the point expected claims. Some of the approaches are mathematically simple and some involve complex statistical modeling. Most often used by commercial insurers is a relatively simpler approach. Actuaries for commercial insurers frequently apply a claim ratio method, where ultimate claims for an experience period are equal to a selected expected claim ratio multiplied by the earned premium.
Such an approach tacitly relies on the accuracy of policy pricing and underwriting. An example of the other end of the spectrum would be a complex simulation model built to project expected claims for captive insurers covering errors and omissions liability for potential blood-related diseases
In many respects very basic calculations of determining expected claims for an exposure-based method. Actuaries calculate expected claims by multiplying a pre-determined exposure base by a selected measure of claims per unit of exposure. The unpaid claim estimate is simply the projected claims less paid claims. The two challenges of the expected claim method are determining the appropriate exposure base and estimating the measurement of claims relative to that exposure base.
The most common exposure base for an insurer and reinsurer is earned premium and the most common measurement of claims is the claim ratio.
Expected claims = The earned premium * expected claim ratio.
Self-Insurer does not generally collect premiums in the same way that an insurer does. As a result, data analyst — working with self-insurers generally use other exposure bases that are readily available and observable, also they believe which are closely related to the risk and thus the potential for claims
When the Expected claims technique works vs when it does not
As mentioned early, when an insurer is entering a new line of business or a new territory -the expected claims method is often used. If actual historical claims experience is unavailable for the insurer, the actuary may be able to turn to insurance industry benchmarks for claim ratios, pure premiums, and claim development patterns. Actuaries also use the expected claims techniques for the most recent years in the experience period when the cumulative claim development factors are highly leveraged.
In addition, the expected claims method often depends upon when an insurance company has significantly experienced the change either due to internal factors or external influences.
For example, after certain crucial legal environmental changes, an insurance company may decide to use an expected claim ratio method for the latest year in the experience period. A steep increase in the statute of limitations for filing claims or expanded coverage due to recent court decisions are examples of changes in the legal environment that can affect insurers’ claim liability.
The subjected technique has the advantage of maintaining stability over a considerable length of time. The ultimate claims estimate changes when there is a change in assumption related to the exposure or claim ratio. When there is a probable advantage considering the stability of the projections, on the other hand, there is a likelihood of lagging responsiveness to recent experience which is the disadvantage. Because the technique ignores actual claims experience as reported when the actual claims experience differs from the initial expectations-this method is not responsive.
Sometimes, the actuary will judgmentally adjust the claim ratio based on historical experience due to a belief that either the pricing or underwriting or both are changing.
In such a situation, the actuary may be able to adjust the prior expectation in advance of changes being fully manifest in the data. In this situation, the expected claims method could prove to be more responsive than data-dependent methods.