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A “negative” loss ratio?!

What’s better for an insurer than a very low loss ratio?  A negative one!  How is this even possible?  According to the California Department of Insurance’s Market Share Report for workers compensation, State Compensation Insurance Fund’s 2011 loss ratio was an astoundingly low 22.75% !!!  But that was terrible compared to AIG’s.  It had a “Loss Ratio” of minus 36.83%!

Although the CDI’s website doesn’t explain this, the “historical results” it shows are calendar year, not accident year.  Calendar year statistics reflect reserve credits in a given year, even if related to claims in previous years.  Major aggregate changes can happen, for example, if a court decision suddenly reduces the value of many outstanding claims.  Thus, the published statistics don’t necessarily measure an insurer’s claims against the premium earned on the same policies that produced those claims. Accident year statistics are more accurate in this regard.  Lesson: As with all statistics, be sure that you understand what they actually represent!  

Published: Thursday, March 13, 2014
Last updated: Tuesday, September 9, 2014
By: Arthur J. Levine, Ph.D.

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