EXPECTED LOSS RATIO METHOD
1. Uses expected ultimate loss ratios to project ultimate losses.
2. Expected ULR is based on trends of past data, underwriter's view, industry loss ratio, pricing targeted loss ratio.
3. Insurers often use the expected loss ratio on the amount and quality of data that is available and does not take into account actual paid losses.
4, The lack of sensitivity to changes in reported and paid losses makes it less accurate and less useful.
SCENARIOS FOR EXPECTED LOSS RATIO METHOD
1. There is no history such as new product lines, radical changes in product lines, immature accident years for long tailed lines.
2. Changes in operational processes such as faster claims processing and changes in reserving process.
IBNR
1. use the expected loss ratio to calculate the incurred but not reported (IBNR) reserve and total reserve.
2.The expected loss ratio is ratio of ultimate losses to earned premiums.
3. The ultimate losses can be calculated as the earned premium multiplied by the expected loss ratio.
4. The total reserve is calculated as the ultimate losses less paid losses.
5. The IBNR reserve is calculated as the total reserve less the case reserve.
EXAMPLE
1. an insurer has earned premiums of $10,000,000 and an expected loss ratio of 0.60.
2. Over the course of the year it has paid losses of $750,000 and case reserves of $900,000.
3. The insurer’s total reserve would be ($10,000,000 * 0.60 - $750,000) = $5,250,000
4. IBNR reserve would be ($5,250,000 - $900,000) = $4,350,000
