Individual Risk Loss Development

Commercial lines prospective individual risk rating plans utilize the individual risk's own loss experience as one input into the determination of the premium charge for that risk. For long tail coverages such as General Liability, an accurate estimate of the risk's ultimate losses is an important and necessary pricing element. Current plans utilize IBNR estimates which are based on either the risk's known losses or the risk's expected losses. This paper proposes an alternative hybrid approach which incorporates both methods. The impact that this approach has on the pricing of individual risks is shown in the context of the IS0 General Liability Experience Rating Plan. A sensitivity analysis is done based on the parameters of expected losses, expected loss development in the aggregate, expected loss development on reported claims, and the amount of reported losses.