Accident Year Experience

Accident year experience shows the premiums earned and losses incurred during a specific period of time. An accident year experience is typically examined for a twelve-month period, 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.

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

Calendar year experience includes losses incurred during the calendar year (typically starting on January 1) 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 course of 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: 1) the calendar year experience looks at losses from claims made during a specific year (emphasis on “loss”); and 2) 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 is that insurers continuously underwrite new policies, which makes the analysis of policies underwritten late in the calendar year different. In fact, 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 amount 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.