Loss Ratio

[nyc2phi]

I am still new to having a loss ratio matter and I am still not quite sure I understand how it works.

I noticed I have claims that are open and claims that are closed. It appears they are currently taking the total amount of open and closed claims and comparing it to how much earned premium I have written. This gives them a ratio or percentage of claims vs. earned premium to determine how well or bad I am doing, correct?

I am in my first year so will they calculate my loss ratio and earned premium on an annual basis and look at it that way or will they add my earned premium up for each year and compare it to the total amount of open and closed claims for each year? '

I.e. earned premium year 1+ earned premium year 2/ total losses year 1 + total losses year 2

 

[insurance1822]

I am still new to having a loss ratio matter and I am still not quite sure I understand how it works.

I noticed I have claims that are open and claims that are closed. It appears they are currently taking the total amount of open and closed claims and comparing it to how much earned premium I have written. This gives them a ratio or percentage of claims vs. earned premium to determine how well or bad I am doing, correct?

I am in my first year so will they calculate my loss ratio and earned premium on an annual basis and look at it that way or will they add my earned premium up for each year and compare it to the total amount of open and closed claims for each year? '

I.e. earned premium year 1+ earned premium year 2/ total losses year 1 + total losses year 2

It depends on the carrier, however they will take open claims (typically the reserve amount which is the set aside amount that they anticipate they'll end up paying) along with closed claims (total paid ytd) and count that against your YTD earned premium. When you're new it's extremely easy for loss ratio problems because much of your written premium hasn't been earned yet. If your manager (which you prob don't have one right because your "indy" right?..ha...) is even attempting for a second to breathe down your neck then he's a POS because 1 small claim can destroy a new agent from a LR standpoint & of course they know that.

It's commonly understood that the early years of an agency aren't a true indicator of profitability from a loss ratio standpoint because it's too easy to have a few claims crush you. As you grow..you'll be able to absorb more claims & remain profitable.

Trust me...don't sweat LR problems early on. Your best bet is to tell your POS manager to F-off. If you've written business in their preferred tiers then it's just $hit luck. If you've written business in their crappy tiers then your manager may have 1% of a point...but again when you're new/small the loss ratio can go to hell in a handbag instantly.

Your "earned premium" will continue to grow every year. Every calendar year they'll take the new claim reserves & closed calendar claims and compare it to your overall earned premium. So technically speaking if you write the same amount of new business over the next 3 years & suffer the same claim experience you did in this calendar year which is being brought to question...your loss ratio will be much lower because the earned premium will be bigger.

BTW umm...you really should know this as an agency owner? From previous posts I gather you may be close to NJ/NY risks so be very careful to avoid PIP losses in those states. It's simple metrics & in the 1st 3 years a good loss ratio is good luck & a bad loss ratio is bad luck (if you're writing good business.)

BTW...Erie knows that. So the fact you're even asking (which suggests your management didn't make it clear this is a normal issue w/ start ups) may be an indicator your manager is a fool

 

[nyc2phi]

It depends on the carrier, however they will take open claims (typically the reserve amount which is the set aside amount that they anticipate they'll end up paying) along with closed claims (total paid ytd) and count that against your YTD earned premium. When you're new it's extremely easy for loss ratio problems because much of your written premium hasn't been earned yet. If your manager (which you prob don't have one right because your "indy" right?..ha...) is even attempting for a second to breathe down your neck then he's a POS because 1 small claim can destroy a new agent from a LR standpoint & of course they know that. It's commonly understood that the early years of an agency aren't a true indicator of profitability from a loss ratio standpoint because it's too easy to have a few claims crush you. As you grow..you'll be able to absorb more claims & remain profitable. Trust me...don't sweat LR problems early on. Your best bet is to tell your POS manager to F-off. If you've written business in their preferred tiers then it's just $hit luck. If you've written business in their crappy tiers then your manager may have 1% of a point...but again when you're new/small the loss ratio can go to hell in a handbag instantly. Your "earned premium" will continue to grow every year. Every calendar year they'll take the new claim reserves & closed calendar claims and compare it to your overall earned premium. So technically speaking if you write the same amount of new business over the next 3 years & suffer the same claim experience you did in this calendar year which is being brought to question...your loss ratio will be much lower because the earned premium will be bigger. BTW umm...you really should know this as an agency owner? From previous posts I gather you may be close to NJ/NY risks so be very careful to avoid PIP losses in those states. It's simple metrics & in the 1st 3 years a good loss ratio is good luck & a bad loss ratio is bad luck (if you're writing good business.) BTW...Erie knows that. So the fact you're even asking (which suggests your management didn't make it clear this is a normal issue w/ start ups) may be an indicator your manager is a fool

Thank you I appreciate your input.

I'm not getting pressured by the carrier about loss ratio, I am mostly just concerned myself due to one large open claim. It doesn't appear yet that I have any kind of frequency issue it's just really that one claim and a few small ones that have my ratio skewed.

I've yet to finish my first year as an agency owner and based off what you and others said it's a bit too early to worry about it.

 

[shawnmwalker]

Don't worry NYC, Until your Earned catches up with your Written and until you have 1,000,000 + In WP the numbers are to small to be viable anyway. Every carrier knows this. Pass your audits and avoid frequency. This also becomes a problem when you grow too fast. Like when you take a 6 million dollar book and make it 10 million in one year.

Remember insurance works because of the law of Large numbers. If you have a 50k book and you have a total loss, your LR is done, but you don't have Large numbers to base them off of.

 

[nyc2phi]

Don't worry NYC, Until your Earned catches up with your Written and until you have 1,000,000 + In WP the numbers are to small to be viable anyway. Every carrier knows this. Pass your audits and avoid frequency. This also becomes a problem when you grow too fast. Like when you take a 6 million dollar book and make it 10 million in one year. Remember insurance works because of the law of Large numbers. If you have a 50k book and you have a total loss, your LR is done, but you don't have Large numbers to base them off of.[/QUOTE

Thank you Shawn.

I am doing a better job of field underwriting now as well. Not saying the accounts that had claims were bad risks but they could of been evaluated better before I placed them on the books.

 

[Sales71]

Don't worry NYC, Until your Earned catches up with your Written and until you have 1,000,000 + In WP the numbers are to small to be viable anyway. Every carrier knows this. Pass your audits and avoid frequency. This also becomes a problem when you grow too fast. Like when you take a 6 million dollar book and make it 10 million in one year. Remember insurance works because of the law of Large numbers. If you have a 50k book and you have a total loss, your LR is done, but you don't have Large numbers to base them off of.[/QUOTE

Thank you Shawn.

I am doing a better job of field underwriting now as well. Not saying the accounts that had claims were bad risks but they could of been evaluated better before I placed them on the books.

Erie might not count the LR in your bonus since they know new agents tend
to place everyone that walks in the door.

 

[1manshow]

Trust me...don't sweat LR problems early on. Your best bet is to tell your POS manager to F-off. If you've written business in their preferred tiers then it's just luck. If you've written business in their crappy tiers then your manager may have 1% of a point...but again when you're new/small the loss ratio can go to hell in a handbag instantly.

Can you try this and let me know how it goes

 

[djs]

A lot of things can also get backed out of claims in a loss ratio, so its always a moving target.

Paid subrogations can reduce your loss ratio
Claims that are 'catastrophic' may be backed out for most calculations (i.e., a major storm as opposed to a single thing).

Probably a few others that I'm not thinking of right now.

Just manage the business you write, verify renewing business and the loss ratio will take care of itself.

Dan

 

[shawnmwalker]

Two more variables that add to the moving target:

IBNR
Reserves being dropped or increased