Formulas - Pricing
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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
