Rates should be equitable, meaning similar risks should pay similar premiums.
No actuary blindly trusts data. is the weight assigned to an insurer's own data versus a broader industry standard. Rates should be equitable, meaning similar risks should
: The portion of the rate allocated purely to paying claims and the specific legal or medical expenses tied to those claims (known as Loss Adjustment Expenses, or LAE). : The portion of the rate allocated purely
$$ \textPremium = \textLosses + \textExpenses + \textProfit $$ On December 31st, a covered accident occurs
Loss reserving is the process of estimating the ultimate financial liability for claims that have already occurred but have not yet been fully paid out by the insurer.
Imagine an insurance company writes a policy on January 1st. On December 31st, a covered accident occurs. The insured immediately files a claim. However, the final settlement of that claim—including legal fees, medical bills, and potential jury awards—might not be known for three, five, or even ten years.
Loss reserving is the practice of setting aside financial reserves on a company's balance sheet to pay for claims that have already happened but are not yet fully resolved. Because P&C claims can take months or decades to settle, accurate reserving is critical for evaluating an insurer’s true financial health.