For a one-year policy covering losses that take several years to develop, which ratio is likely to be revised for several years following the policy period?

For a one-year policy covering losses that take several years to develop, which ratio is likely to be revised for several years following the policy period?

• A. Loss ratio
• B. Expense ratio
• C. Combined ratio
• D. Reserve ratio

Answer: (B)

Long-tail losses change the numbers insurers use to report performance. The ratio that reflects ultimate losses relative to earned premium is the loss ratio, so as more claims are reported and the expected total cost of those claims is updated, the loss ratio is revised. In a one-year policy where losses can develop for several years, those estimates of ultimate loss will be updated repeatedly, causing the loss ratio (and often the combined ratio) to change for several years after the policy period. The expense ratio, on the other hand, is based on underwriting costs such as commissions and operating expenses that are largely known at or near the time the policy is written. Those costs don’t drift upward with claim development in the same way, so the expense ratio is not typically revised year after year due to loss development.

Long-tail losses change the numbers insurers use to report performance. The ratio that reflects ultimate losses relative to earned premium is the loss ratio, so as more claims are reported and the expected total cost of those claims is updated, the loss ratio is revised. In a one-year policy where losses can develop for several years, those estimates of ultimate loss will be updated repeatedly, causing the loss ratio (and often the combined ratio) to change for several years after the policy period.

The expense ratio, on the other hand, is based on underwriting costs such as commissions and operating expenses that are largely known at or near the time the policy is written. Those costs don’t drift upward with claim development in the same way, so the expense ratio is not typically revised year after year due to loss development.