Glossary

Loss rating is a rating technique often used for larger insureds in which that insured's past loss history is used to establish a prospective rate. The past losses are developed and trended, as appropriate, and divided by the amount of a selected exposure base to determine a relationship between the exposure and loss experience. Assuming that the historical data are credible, the resultant factor (loss rate) divided by the insurer's acceptable, or permissible, loss ratio becomes the prospective rate. In some cases, the loss rate is modified to account for possible variations between expected and actual losses before it is converted into the prospective rate.

The loss ratio is the proportionate relationship of incurred losses to earned premiums expressed as a percentage. If, for example, a firm pays $100,000 of premium for workers compensation insurance in a given year, and its insurer pays and reserves $50,000 in claims, the firm's loss ratio is 50 percent ($50,000 incurred losses/$100,000 earned premiums).

Loss ratio coverage refers to a form of stop loss reinsurance under which the reinsurer pays a portion of the claims represented by a loss ratio in excess of a specified loss ratio. For example, "20 percent in excess of 110 percent" will result in claims between 110 percent and 130 percent being paid by the reinsurer.

Loss reduction is a control activity focusing on reducing the severity of losses. Examples include building firewalls to reduce the spread of fire and installing automatic fire sprinklers.

A loss report is a listing of reported claims providing such information as the date of occurrence, type of claim, amount paid, and amount reserved for each as of the report's valuation date.

A loss reserve is an estimate of the value of a claim or group of claims not yet paid. A case reserve is an estimate of the amount for which a particular claim will ultimately be settled or adjudicated. Insurers will also set reserves for their entire books of business to estimate their future liabilities.

Loss reserve stability refers to an actuary's ability to predict future loss reserves based on a specific set of circumstances. For example, once a viable risk retention group (RRG) has been operating for at least 5 years, the collective loss experience for future periods can be predicted with greater certainty than was possible for the earlier periods. This is because the majority of the data used to predict future losses were experienced RRG format, as opposed to those periods prior to the formation of the group.

A loss run refers to periodic reports of claim information provided by insurance companies to their insureds.

Loss sensitive plans are insurance rating plans for which the final premium is dependent on the actual losses during the period the plan is in effect. This risk financing technique places upper limits on the insured's costs if its losses are high but also requires the payment of a minimum premium in the event it experiences low losses or is loss-free. Thus, the risk financing costs tend to vary based on actual loss experience. This type of plan provides an incentive for insureds to emphasize safety and loss control activities. Deductible plans, retrospective rating plans, dividend plans, and retention plans are all examples of loss sensitive plans.

Loss trending is the adjusting of historical losses to account for inflationary trends so that their value is in current dollar amounts. Historical loss amounts are multiplied by "trending factors" to convert historical loss amounts to current dollar amounts.