Measuring Division Operating Profitability

We have developed a “Company Return” of operating results by division office and line. Company Return actuarially reflects loss development, retrospective rating plans, dividend plans, reinsurance, cash flow plans, and investment income. Losses are on an accident year basis. A retro accrual is deducted from the premium for retrospective returns paid or anticipated. A similar adjustment is made for dividends to policyholders. Large audits appearing in the wrong year are adjusted to the proper year. Reinsurance ceded is deducted from premiums and losses. Division investment income is split into two components. Investment income reflecting the fact that losses are paid out over a period of time is handled by an incurred loss discount factor, which varies by line of business. The investment income gained or lost based on the speed with which the premium is collected is measured by a so-called Cash Collection Adjustment. Our top management uses the Company Return as the primary measure of division profitability.