Reviewed by Sep 30, 2020| Updated on
Policy year experience depicts the overall losses and premiums that are associated with policies that are renewed and underwritten by an insurer over a specified timeframe. Policy year experience is one of the several ways that an insurer uses to set losses against the premium earned by them.
Insurance companies may calculate policy year experience on an individual policy or aggregate, which means the overall premiums and losses for the complete set of policies issued. Most insurers make use of the calendar year experience in order to calculate the relationship between premiums and losses. This method is referred to as the accident year experience.
Policy year experience will look at the worth of losses that are resulting from the policies that were renewed or issued over a particular time frame, and it is generally a year. The worth of losses would be equal to the value of losses paid, and it includes loss reserves. This figure will include losses irrespective of the time at which the insurer is reported of the loss by the insured.
The date of the claim or when the person claiming would receive their reimbursement for the losses they have suffered can be irrelevant with respect to the calculation of policy year experience, given that the insured held a valid policy at the specified time.
Accident year experience varies from policy year experience. The former will calculate only those losses that are being examined over a given period of time. Hence, the losses that are happening post the given time period will be accounted for the next cycle.
If polices do not have a restriction on when a loss could be reported, then that insurer would have to update their policy year experience continually. This, at times, could be difficult for that insurer to assess and fix the prices of their insurance premiums.