Policy Year Experience

Policy year experience describes the total premiums and losses associated with insurance policies underwritten or renewed by an insurance company within a given time period. Policy year experience is one method used by insurance companies to set losses against earned premiums.

Insurers calculate policy year experience either for individual insurance policies or in aggregate, meaning the total losses and premiums for an entire set of policies.

Insurance companies also use calendar year experience as a method for calculating the relationship between loss and premiums. This method is also known as accident year experience.

Policy year experience looks at the value of all losses coming from insurance policies created or renewed within a specific period of time, often a 12-month window.

The value of losses equals the actual amount of losses paid, including loss reserves. This amount counts losses regardless of when the insured reported the loss to the insurer. The date of either the claim or when claimants receive reimbursement for their losses does not matter when calculating policy year experience, provided the insured had an active and up-to-date policy during the specified time.

For example, say a person's auto insurance policy is effective for all of 2018, and they they get into an accident in November. The insurance company doesn't pay the claim until early 2019. This loss still counts toward the 2018 policy year. 

The developed earned premium for policies always equals the written premium paid by policyholders for the given time period. The total amount of losses or profit from earned premiums cannot be calculated until all losses are settled.

Policy year experience differs from accident year experience in that accident year experience only calculates losses during the time period being examined. Thus, any losses after the given time period count toward the accident year experience for the following year.

If a policy does not place a limit on when losses can be reported, the insurer may have to continually update its policy year experience, which sometimes makes it difficult for that company to assess its bottom line and price its premiums accordingly.