An Enhanced On-Level Approach to Calculating Expected Loss Costs

Virtually every loss reserve analysis where loss and exposure or premium data is available includes an estimate of an expected loss cost to be used in the calculation. Most estimates are either calculated by trending forward historical loss costs or are judgmentally selected. Occasionally, a change in the underlying exposure is reflected, usually in the form of a judgmentally selected factor. The methodology we present is a simple approach to using individual risk experience in generating a series of on-level factors that can reflect changes in mix by year in the development of expected loss costs. In addition, possible enhancements to the method to reflect the incorporation of new exposures over time are included. The result is a series of expected loss costs that better reflect the composition of business in a given accident or policy year, while still including the stability gained by utilizing multiple years of experience. <p>
<b>Keywords</b>: Loss costs, initial expected loss cost, exposure, on-
level, trend, Bornhuetter-Ferguson method