Glossary

Expense in an insurance context refers to the cost of operating the insurance business exclusive of losses or claims.

An expense allowance is the compensation paid to life insurance agents over and above commission to reimburse them for certain expense items incurred in doing business.

Expense constant is a fixed, flat expense charge applied to every workers compensation policy in states using advisory rates. The charge applies in addition to the premium developed for that policy and recognizes that some of the administrative costs associated with writing a workers compensation policy do not vary with the amount of premium and should, therefore, not be included in the factors that are used to develop rates.

The expense load is an amount the insurer adds to an insurance premium to cover business expenses and the contingencies, including cost of capital, shown mathematically as follows. Premium = Claims + Expenses + Profit loading. Profit loading is usually expressed in factor "times" or "percentage" of expected claims and business expenses or shown mathematically as the following. Premium target = (1+ r) X; r = profit loading factor expressed in percentage; X = sum of claims losses expected and other business expenses – administrative costs, commissions, overhead cost

The expense ratio is the percentage of premium used to pay all of the costs of acquiring, writing, and servicing insurance and reinsurance. There are two methodologies to measure the expense ratio: a trade basis, which is when the expense is divided by written premium, and on a statutory basis, which is when the expense is divided by earned premium. Most typically, the ratio is calculated using written premium. Expense ratios are an integral part of retrospective rating basic premiums.

Expense reserve refers to a liability item for expenses incurred but not paid.

Experience in an insurance context is the loss record of an insured or of a class of coverage. It is also the classified statistics of events connected with insurance, of outgo or of income, actual or estimated.

An experience account is an account into which premiums are deposited, which is established as part of a finite risk insurance program. There is no risk sharing with the funds of any other of the insurer's clients in an experience account (i.e., they contain only a single insured's reserve fund that has been established for a specific program). Therefore, balances reflect an individual insured's actual loss experience under a finite program. The account earns investment income, and at the end of the policy term (usually several years), any principal and interest that has not been paid out as losses is returned to the insured.

Experience modification is the actual process by which the factor developed through experience rating is applied to the premium of the insured.

An experience modifier is a factor developed by measuring the difference between the insured's actual past experience and the expected or actual experience of the class. This factor may be either a debit or credit and, therefore, will increase or decrease the standard premium in response to past loss experience. When applied to the manual premium, the experience modification produces a premium that is more representative of the actual loss experience of an insured. An employer with average experience has a modifier of 1.0 and would pay the manual premium. Employers with poorer loss experience would have modifiers greater than 1.00 and would pay more than manual premium. Those with good experience would have modifiers below 1.00 and pay less than manual premium.