DEFINITION of ‘Policy Year Experience’
The premiums and losses associated with insurance policies that were underwritten or renewed within a given period of time. Policy year experience is one of the methods of setting losses against earned premiums. The other method is the calendar year experience.
BREAKING DOWN ‘Policy Year Experience’
Policy year experience looks at the value of all losses coming from insurance policies that were created or renewed given a specific period of time, such as a twelve-month window, and divides this value by the developed earned premium for these policies. The value of losses is equal to the actual amount of losses paid, including loss reserves, and counts losses regardless of when the loss was reported to the insurer. The developed earned premium for policies will always equal the written premium.
During the course of the time period, the loss experience will develop, but the total amount of losses or profit from earned premiums cannot be calculated until all losses are settled. When an insurer examines the policy year experience, it is looking at its experience for all policies that were effective during the year. For example, the policy year experience for 2014 will be from January 1, 2014, through December 31, 2014.
Policy year experience differs from accident year experience. For instance, accident year experience has a reduced period of time between the experience period and effective date. This is because policy year experience looks at losses that not only occur during the year that the policy was in effect, but also later years in which losses may be reported. If a policy does not place a limit on when losses can be reported, the insurer may have to continually update its policy year experience. For example, a policyholder may discover a loss several years after the loss event occurred, and subsequently report that loss to the insurer. The insurer will have to take this into account.