Model for Estimating Loss Costs for Alternative Market Risks: A

The process of estimating loss costs for risks in the alternative market is most often based on the loss experience of either the individual member, the group as a whole, or some combination of the two. This paper will outline a model used successfully over the past nine years for more than a dozen captive insurance companies. Due to the myriad of risks and information available, the model must be flexible enough to handle insufficient information but robust enough to produce reliable estimates of future loss costs for a variety of individual and group risk situations. Most importantly, the loss cost estimation process must incorporate a large number of considerations unique to individual risks. These considerations include data availability and organization, credibility, loss development, trend, policy provisions, reinsurance. Operational changes, legislative/regulatory/judicial influences and actuarial judgment. The model is presented by outlining the general methodology, major assumptions, potential problem areas and potential resolutions, and a discussion of the model’s advantages and disadvantages.