Jul 18, 2024
Part 1: Understanding Loss Run Reports and Use Cases in Insurance
In the insurance industry, understanding past losses is crucial for risk assessment, premium calculations, pricing, and policy renewal. The primary data required for this is the claims data, which is provided by Loss Runs, a document that details historical losses associated with an insured over a specific period.
The significance of loss runs extends beyond just the insurance company; they are equally important to brokers and policyholders. Brokers use these reports to negotiate better terms and premiums for their clients, while policyholders rely on them to understand their loss history and manage their insurance needs effectively. Given their pivotal role, the accuracy, clarity, and timely availability of loss runs are paramount for the efficient functioning of the insurance ecosystem.
Despite their importance, loss runs are notoriously difficult to process and interpret due to several inherent issues. These issues stem from the complexity and variable nature of loss run reports, the quality and consistency of the data they contain, and the limitations of existing technologies in handling such documents.
Understanding and addressing these challenges is important for the insurance industry as it strives to enhance operational efficiency, improve risk assessment, speed up turnaround time for submission to quote, and provide better services to policyholders.
Loss Run Reports
Loss Runs are comprehensive reports that provide detailed information about historical losses, i.e., claims history, associated with an insured party for a commercial or specialty insurance policy. Typically generated by insurance carriers or brokers, they provide a wealth of data which includes:
– Policy details: Policy number, period, line of business (LOB), etc.
– Claim details: Claim number, type of loss, cause of loss, accident description, loss date, claim date, closure date, coverage type, claim status, etc.
– Severity of claim (Financial data): Loss incurred, expenses incurred, reserve amount, outstanding amount, recoveries, total incurred, and total net loss.
Use Cases
1. Underwriting:
Underwriters rely on loss runs to evaluate the risk profile of potential insureds. By analyzing past claims, they can determine the likelihood of future claims and set appropriate premiums. Loss runs help in understanding losses at a detailed level, including:
- Type of claims
- Financial impact and costs of claims
- The frequency and severity of prior claims
- Location of the claims (to determine exposure footprint)
2. Premium and Rate Calculation:
Actuaries and underwriters use loss run data to calculate premiums and rates. Historical loss data helps in understanding risk exposure and establishing rates that reflect the true cost of potential future claims.
3. Policy Renewals:
Loss runs provide insurers with the necessary data to decide whether to renew a policy and under what terms. A history of frequent or severe claims may lead to higher premiums or non-renewal.
4. Broker Negotiations:
Brokers use loss runs to negotiate better terms and premiums for their clients. They analyze the data to highlight favorable risk profiles and argue for lower rates or enhanced coverage.
5. Risk Management:
Policyholders can use loss runs to identify patterns in their claims history and implement measures to mitigate future risks. This proactive approach can lead to fewer claims and more favorable insurance terms.
6. Portfolio Management:
Insurers use loss runs to manage their overall book of business. By analyzing aggregated data from multiple loss runs, they can identify trends, assess the performance of different segments of their portfolio, and make strategic decisions about risk exposure, pricing, and product offerings. Effective portfolio management helps insurers maintain profitability and competitiveness in the market.
Author
Product Manager, IntellectAI
