Reserving for Loss Sensitive Premium Items

Many insurers and reinsurers have significant accruals for loss sensitive premium items. Examples of contract features which may require an accrual are: 1. Retrospective rated policies and dividend policies for primary insurers; and 2. Contingent profit commission and no claim bonuses for reinsurers. In estimating these accruals it is important to reflect the range of potential outcomes as illustrated by probability distributions as expected values will usually create biased results. This paper discusses a general framework for establishing these accruals and then describes the process for two hypothetical policies.