Accident Year Experience

What Is Accident Year Experience?

Accident year experience is a term used in the insurance industry to describe the premiums earned and losses incurred during a specific period of time. An accident year experience is typically examined for twelve months, called the accident year. The exposure period is usually set to the calendar year and starts on January 1.

Accident year experience is used to indicate whether premiums effectively cover an insurer’s losses. A negative statistic indicates that the premiums were not enough to cover losses. Accident year experience typically includes losses when they occur, not when they are reported. It also includes premiums earned during the same period of time, regardless of when the premiums were underwritten.

Understanding Accident Year Experience

Insurance underwriters insure people and businesses by weighing up the risks and determining the premium to charge to insure that risk. A calendar year experience is used to indicate whether premiums effectively cover an insurer’s losses.

An insurer’s calendar year experience is, therefore, a measure of how well a company underwrites insurance and its ability to evaluate risks. To be profitable, calendar year experiences need to be greater than one.

Calendar Year Experience vs. Policy Year Experience

There are two types of accident year experience calculations: calendar year experience and policy year experience.

The calendar year experience includes losses incurred during the calendar year and premiums earned during the same period of time. Losses include incurred but not reported (IBNR) losses, and changes to loss reserves.

Policy year experience includes premiums and losses from policies that are renewed or are underwritten during a given year. Losses (including loss reserves) from policies are only included if the policies are renewed or underwritten during the year, and premiums are only included if they are earned during the same time. During the year, the calculation is considered to be “developing,” which means that the calculation cannot be finalized until losses are settled.

The difference between the two methods is that the calendar year experience looks at losses from claims made during a specific year (emphasis on “loss”), and the policy year experience looks at how a specific set of policies — those that come into effect during the year — are exposed to losses (emphasis on “exposure”).

Actuaries use policy year data because it matches claims made against specific policies. The disadvantage of employing this method is that insurers continuously underwrite new policies, which makes the analysis of policies underwritten late in the calendar year different. These policies will stretch over two calendar years.

The most accurate way to calculate accident year experience is to divide total losses (losses incurred plus loss reserves) by exposure earned, which is the number of premiums exposed to loss over a given period of time. Because this method can take more time to calculate, earned premiums may be calculated using the account earned method.

How to Calculate Accident Year Experience

Accident year experience is calculated as such:

Accident Year Experience = Accounting Earned Premium / Incurred Losses and Loss Adjustment Expenses (LAE), the cost associated with investigating and settling an insurance claim, for all losses.

Incurred but not reported (IBNR) losses, and changes to loss reserves — an estimate of the amount an insurance company will have to pay out on future insurance claims on policies that it has underwritten — are also taken into consideration when calculating losses.