Formulas - Pricing

Refer Notation - Pricing for the list of symbols used in the pricing text. The link is also in the sidebar under Miscellaneous Battle Reports, but just as a quick reminder:

X = Exposures (number of exposures), P = Premium (dollars), L = Losses (dollars)

EP = Earned Premium (dollars), WP = Written Premium (dollars)

• Note that P can refer to either EP or WP, although in the formulas below it's more common to use EP.

In the table below I also use:

F = Frequency, S = Severity, LR = Loss Ratio,

U/W as an abbreviation for Underwriting (so U/W should not be interpreted as a formula U divided by W)

Ratio	Formula	Alternate Term/Formula or Comment
Frequency	counts / X	counts-per-exposure
Severity	L / counts	dollars-per-count
Pure Premium	L / X	=   F x S
Loss Ratio (LR)	L / P	P is usually EP (Earned Premium)
LAE Ratio	LAE / L	LAE includes ALAE and ULAE
Loss & LAE Ratio	(L + LAE) / P	=   LR   x   (1 + LAE Ratio)
U/W Expense Ratio (UWER)1	(Comm + Other + TLF) / WP    +    General / EP	uses both WP and EP
Operating Expense Ratio (OER)	U/W Expense Ratio    +    LAE / EP	monitors operational expenditures
Combined Operating Ratio (COR)	LR    +    LAE / EP    +    U/W Expense Ratio	primary measure of profitability
Retention Ratio	( # of policies renewed )   /   ( # of potential renewal policies )	measures loyalty
Close Ratio	( # of accepted quotes )   /   ( # of quotes )	measures product attractiveness

¹ (Comm + Other + TLF)   =   Commissions & Brokerage   +   Other Acquisition Expenses   +   Taxes, Licenses and Fees