The Best Loss-sensitive Programs

Five-Star Excellence Awards in Worker’s Compensation

A loss-sensitive program is one in which the final premium payable will vary depending on any claims that may occur for the insured period.


These programs are better suited to companies that have a higher risk tolerance. Since the upfront costs are lower, loss-sensitive programs provide an added incentive to emphasize safety and reward businesses with low-claims activity.


For loss-sensitive workers compensation policies, the losses incurred during the policy period dictate the final premium. A policyholder will usually have a minimum premium and then a final (usually capped) payment depending on claims made during the period.


Sometimes, a loss-sensitive plan can help a business save money. In other cases, it can cost businesses more than a guaranteed plan. When selecting this type of program, it is important that businesses understand their risk tolerance.


5-Star Excellence Awards

  • AIG
  • Chubb Everest Insurance
  • Key Risk - a Berkley Company
  • Liberty Mutual Insurance
  • Method Insurance Services
  • Safety National
  • The Hartford
  • Travelers
  • Zenith Insurance
  • Zurich Insurance Group


What is a loss-sensitive insurance policy?

Loss-sensitive programs are a form of self insurance, letting companies pay a lower up-front premium to pay for their own losses up to the deductible. The insurer pays the claim, as losses occur, and bills the company for the loss and the service fees for losses within the deductible.


A more typical workers’ compensation policy, like most insurance policies, is called ‘guaranteed cost’ coverage, which simply means companies pay a flat rate up front for a specific amount of coverage. Loss-sensitive programs, however, self-adjust based on a variety of factors – primarily the cost of claims. These programs are ideal for larger companies that can handle the additional risk.


What does loss pick mean in insurance?

Loss pick – which is also called ‘expected losses’ – is essentially an underwriter’s estimation of a company’s losses based on previous trends. Typically, 5 years of historical loss data will be crunched to predict an estimate of losses over the next year. Loss picks quantify a loss estimate of a standard loss-sensitive plan, like, for instance, a retrospective program. Expenses and the loss pick make up the premium.   


What is guaranteed cost workers’ compensation?

For guaranteed cost workers’ compensation policies, premiums are charged on a prospective bases, without adjustment for loss during the policy period. At the inception of the policy, a rate is agreed upon and, to yield the premium, is then multiplied by the appropriate exposure base: sales, payroll, number of vehicles, square footage, etc. In workers’ compensation or general liability, for example, changes to the exposure base during the policy period will affect the premium. Put another way, the premium will be adjusted if the actual exposure base at the end of the policy period is more or less than the estimate used at the inception of the policy. Losses incurred during the policy period do not impact the premium within that period.


Understanding the loss development triangle

A loss triangle is a table showing total losses over periods of regular valuation dates, which reflect the change in amounts as claims mature. In the table, older periods will have one more entry than the next youngest period, forming the data in the table into a triangle shape. Typically, claims are registered during a particular year and the payments are paid out over several years, meaning it is important to know how claims are distributed and paid out – which is precisely what an insurance claims triangle does.


How is loss development factor calculated?

Generally, loss development factors are organized in a loss triangle format. Many actuary loss-reserving methodologies depend on loss development factors and can be calculated entirely from loss triangle data. A loss development factor is the value in the loss triangle divided by the value immediately preceding it in the loss triangle. The loss development methodology is the most common actuarial reserving methodology and is typically the first method applied to estimate ultimate losses and loss reserves.


What is a loss conversion factor?

A loss conversion factor, or LCF, is a variable used in retrospective rating. When insurance companies adjust premiums based on losses incurred, loss conversion factors are added to losses incurred to gain a clearer understanding of the amount they lose with a particular policy. Generally, loss conversion factors assist insurance companies that are trying to solve mathematical issues related to their liabilities and expenses. Insurers could potentially adjust their premium prices, depending on the results in loss conversion factors. Premiums could be raised if losses are too high, and, conversely, premiums may be lowered in losses are low.


What is ultimate loss?

Ultimate loss is the total that the insured, its insurer or reinsurer pay for a fully-developed loss. For a long time after the end of the policy period, it may not be possible to know the exact value of ultimate losses. For the purposes of financial modeling and year-end reserve determinations, actuaries are employed to assist with these projections.


There are two basic definitions of ultimate loss. In liability insurance, the amount that is actually paid, or payable, for the settlement of a claim the reinsured is liable for. In reinsurance, the loss the reinsurance applies to, as determined the agreement, i.e. the gross loss.