Good to Know...

Glossary

YEAR Definitions

Accident Year
Accident year data is based on accidents that occur within a twelve-month period. Thus, accident year 1999 is based on those accidents that occurred between 1/1/99 and 12/31/99.

Accident year statistics assign claim activity to the year of accident - regardless of when the claim payment was made or when the reserve was changed. Because of this, accident year data provides a fairly accurate picture of the results for any given year. This is also the reason accident year statistics “develop,” or change, over time. New transactions (claim payments, reserve changes) are continually allocated back to the year in which the accident occurred. It is many, many years before an accident year can be considered “closed.”

Calendar Year
Calendar year data in contrast, is more from an accounting perspective and contains information about each policy year. For example, policy years 1980-1999 could all have transactions going on in calendar year 1999, and that is what calendar year information is showing - many policy years with activity within one calendar year.

Calendar year numbers reflect all financial transactions that occurred during that calendar year, regardless of when the policy was written or when the accident occurred. Thus, if reserves were raised or lowered in 1999 because of an accident that occurred many years prior, that would impact calendar year 1999. Because such changes in reserves (for old accidents) obscure the “actual” 1999 conditions (i.e. the experience of policies that were in force in 1999), actuaries generally do not use calendar year data in “long-tailed” lines such as workers compensation. However, calendar year data is widely circulated and referenced so it is important that we are familiar with the results.

Policy Year
Policy year consists of a twelve-month period for policies with effective dates within that twelve-month period. For example, policy year 1999 would include premium and loss data on policies effective from January 1 through December 31, 1999. A policy effective 12/31/99 would expire 12/31/2000 and it would be included in policy year 1999 experience.

PREMIUM Definitions

Direct Written Premium
The policy premium adjusted by additional or return premiums but excluding any reinsurance premiums. In financial statements, it is the gross premium income adjusted for additional or return premiums but excluding any additions for reinsurance assumed and any deductions for reinsurance ceded.

Earned Premium
The portion of a policy premium allocable to the expired (or “used up”) portion of the policy term. Earned premium shows the amount of premium that corresponds to the exposure covered over the life of the policy. Compare this to written premium.

Manual Premium
The policy premium developed from the payroll and carrier’s class code rate. For per capita class codes, it is the number of persons multiplied by 10. Statistical codes are not included in manual premium.

Net Premium
Net premium is the final premium that an insured pays. It is the standard premium after the application of premium debits and credits. (Please note that retrospective rating adjustments are not included in the premium adjustments.)

Standard Premium
The manual premium at the carrier’s rate multiplied by the experience modification factor. The standard premium is usually not the final premium that the insured pays. It excludes the effects of some pricing programs, such as premium discounts, schedule rating, deductible credits, retrospective rating, and expense constants that are reported in statistical classes.

The Basic Manual Rule 3.A.20 (old rule VII.C.1):
“ Standard Premium is the premium before the application of the premium discount. It is the state premium determined on the basis of:

Authorized rates

Disease loadings

Nonratable elements

Aircraft seat surcharges

Premium for increased limits of liability

Experience rating modification

Applicable schedule rating modification

Minimum premiums

Total Standard Premium is the total premium for all states covered by the policy excluding expense constant and any disease charge subject to the Federal Coal Mine Health and Safety Act before the application of the premium discount.

Note: The Annual Financial Calls for experience, which are used for ratemaking, contain a different definition of standard premium.”

1996 Workers Compensation Statistical Plan Manual, page 3.5, item 18. Total Standard Premium:
“Report the total premium charged for the policy, excluding the approved expense constant, premium discount, and any special payments to the states that are assessed on total premium writings or total losses incurred.”

The Basic Manual definition is used to determine the premium subject to premium discount. The Statistical Plan Manual instructs what premium to report (for ratemaking purposes).

The Basic Manual Indiana Assigned Risk Special Rules (green pages), LSRP Section, Part One, II.E. Standard Premium
“The premium for the risk determined on the basis of authorized rates, any experience rating modification, ARAP, assigned risk surcharge programs other than LSRP, and minimum premiums.”

Written Premium
The premium charged by an insurance company for the period of time and coverage provided by an insurance contract. Written premium depicts the amount of money placed on the books for the entire policy while earned premium shows the amount of premium that corresponds to the exposure covered over the life of the policy.

OTHER Definitions

Combined Ratio
A combined ratio is also known as an underwriting result. It represents losses and expenses (including policyholder dividends) in relation to premium and does not account for investment income. A ratio (or underwriting result) of 100 is a breakeven point - where losses and expenses (combined) equal premium. A ratio of 130 indicates losses and expenses exceeded premium by 30%. However, any investment income would help offset this 30% loss.

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