Actuarial Terms and Definitions

The following are definitions for common actuarial terms.

Aggregate limits – A limit on the total sum of individual claims during a policy period. This limit can apply in addition to a per-occurrence limit.

Allocated loss adjustment expenses (ALAE) – Expenses that can be attributed to or assigned to a specific claim. These include attorney fees, medical bills, expert witness charges, investigation-related costs, and other expenses that can be assigned to a specific claim.

Benefit level change factor (BLCF) – A factor that quantifies increases in benefit levels attributable to changes in state workers compensation laws. This factor is developed from individual state data.

Case reserves – A specific amount of money budgeted for future payments for claims occurring in a past policy period. Also referred to as “reserves.”

Claims-made – A type of insurance policy that covers claims that are made or reported during a particular policy coverage period regardless of the date of the claim’s occurrence.

Confidence interval – A range of possible loss levels with a corresponding probability or confidence that the loss level will not be exceeded.

Development – The quantitative change in losses from one year to the next due to unreported claims or claims that exceed the case reserves.

Discounting – A method used to find the present value of a future stream of cash.

Estimated required reserves – The actuarial determination of the required reserves for a historical policy period. This amount includes the case reserves plus an estimate of IBNR.

Exposure – A measurement of the amount of risk for a policy year. The typical exposure used for a workers compensation analysis is payroll.

Incurred But Not Reported Losses (IBNR) – This value includes losses that occurred during a policy period but were not reported until after the end of the period. IBNR may also include development on known claims. This occurs when future loss payments are expected to exceed case reserves.

Incurred losses – A statement of the loss amount for a given time period that includes both paid losses and unpaid case reserves.

Indemnity factor – An inflation factor used to adjust historical loss levels for wage inflation.

Inflation trend factor – For workers compensation, a combined factor that represents changes in workers compensation benefit levels, indemnity trends and medical cost trends. For automobile and
general liability, a factor that tracks changes in historical loss costs.

Insurance program – Any program used to finance losses.

Long-tail reserves – Claims that take a long period of time to close. These claims tend to occur in certain lines of coverage.

Loss development factor (LDF) – A factor that is applied to the total incurred losses to estimate the ultimate incurred losses and reflect the impact of IBNR (incurred but not reported) losses.

Loss development triangle – A manner by which an actuary formats data to compute the loss development factors.

Loss pick – The amount of the loss projection for the coming policy period.

Medical factor – A trend factor that reflects inflation in medical costs.

Occurrence – A type of insurance policy that covers the insured for any claim that occurs during the policy period regardless of when the incident is reported.

Paid losses – A statement of the loss amount for a given period that includes only the amount actually paid on the claims.

Parameter risk – The risk taken when you develop a confidence interval around a projected number (the loss pick) and assume that the projected number accurately reflects the underlying distribution.

Payout schedule – An estimate of the timing of payments for projected losses or reserves over the coming months or years based on past payment patterns.

Per occurrence - A limit on each individual claim in a policy period. An aggregate limit may also apply.

Point estimate – A single value which is selected to represent an unknown parameter.

Present value – The amount of money needed today to equal some future stream of money based on a selected interest rate.

Pure loss rates – Trended losses per unit of trended exposures.

Reported losses – A statement of the loss amount for a given time period that includes both paid losses and unpaid case reserves.

Selected loss development factor – The loss development factors selected by the actuary to use in the actuarial analysis to estimate ultimate incurred losses.

Snapshot – A term used to describe the best estimate of the historical losses at a given point in time.

Spread of loss – Another term for confidence interval that describes the potential range of outcomes when forecasting losses.

Ultimate incurred losses – The actuarial estimate of the losses for past policy periods that includes an estimate of IBNR.