ISO's advisory prospective loss costs are accurate projections of average future claim costs and loss-adjustment expenses—overall and by coverage, class, territory, and other categories.

Your company can use ISO's estimates of future loss costs in making independent decisions about the prices you charge for your policies. For most property/casualty insurers, in most lines of business, ISO loss costs are an essential piece of information. You can consider our loss data—together with other information and your own judgment—in determining your competitive pricing strategies.

The insurance pricing problem

Unlike companies in other industries, you as a property/casualty insurer don't know the ultimate cost of the product you sell — the insurance policy — at the time of sale. At that time, losses under the policy have not yet occurred. It may take months or years after the policy expires before you learn about, settle, and pay all the claims.

Firms in other industries can base their prices largely on known or controllable costs. For example, manufacturing companies know at the time of sale how much they have spent on labor, raw materials, equipment, transportation, and other goods and services.

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But your company has to predict the major part of your costs — losses and related expenses — based on historical data gathered from policies written in the past and from claims paid or incurred on those policies.

As in all forms of statistical analysis, a large and consistent sample allows more accurate predictions than a smaller sample.

That's where ISO comes in. The ISO database of insurance premium and loss data is the world's largest collection of that information. And ISO quality checks the data to make sure it's valid, reliable, and accurate.

But before we can use the data for estimating future loss costs, ISO must make a number of adjustments, including loss development, loss-adjustment expenses, and trend.

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Loss development

For most liability lines, ISO aggregates the premium and loss data by policy year. That is, we aggregate all the premiums from all the policies or exposures written during the year and all the losses covered by those policies.

For most other lines of insurance we aggregate the data by accident year. We aggregate all the exposures or premiums earned during the year and all losses on accidents that occur during the year.

In either case, we want to use the most recent available data — the latest available policy or accident years — as the basis for our loss costs. That recent data best reflects the current social, legal, technological, and other conditions that affect losses.

But because it takes time to learn about, settle, and pay claims, the most recent data is always incomplete. Therefore, ISO uses a process called loss development to adjust insurers' early estimates of losses to their ultimate level. We look at historical patterns of the changes in loss estimates from an early evaluation date — shortly after the end of a given policy or accident year — to the time, several or many years later, when the insurers have settled and paid all the losses.

ISO calculates loss development factors that allow us to adjust the data from a number of recent policy or accident years to the ultimate settlement level. We use the adjusted — or developed — data as the basis for the rest of our calculations.

Loss-adjustment expenses

In addition to paying claims, your company must also pay a variety of expenses related to settling the claims. Those include legal-defense costs, the cost of operating a claims department, and others. Your company allocates some of those costs — mainly legal defense — to particular claims. Other costs appear as overhead. ISO collects data on allocated and unallocated loss-adjustment expenses, and we adjust the claim costs to reflect those expenses.

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Losses adjusted by loss-development factors and loaded to include loss-adjustment expenses give the best estimates of the costs insurers will ultimately pay for past policies. But you need estimates of losses in the future — when your new policies will be in effect.

To produce those estimates, ISO looks separately at two components of the loss cost — claim frequency and claim severity. We examine recent historical patterns in the number of claims per unit of exposure (the frequency) and in the average cost per claim (the severity).

We also consider changes in external conditions. For example, for auto insurance, we look at changes in speed limits, road conditions, traffic density, gasoline prices, the extent of driver education, and patterns of drunk driving. For just three lines of insurance — commercial auto, personal auto, and homeowners — ISO performs 3,000 separate reviews per year to estimate loss trends.

Through this kind of analysis, we develop trend factors that we use to adjust the developed losses and loss-adjustment expenses to the future period for which you need cost information.

What you get

With ISO's advisory prospective loss costs, you get solid data that you can use in determining your prices by coverage, state, territory, class, policy limit, deductible, and many other categories.

You get estimates based on the largest, most credible set of insurance statistics in the world.

And you get the benefit of ISO's renowned team of actuaries and other insurance professionals. ISO has a staff of more than 200 actuarial personnel — including about 50 members of the Casualty Actuarial Society. And no organization anywhere has more experience and expertise in collecting and managing data and estimating future losses.

ISO's advisory prospective loss costs are available in a wide variety of electronic formats to meet your automation needs.