IC-45 Formula Sheet
The working formulas of rate making and underwriting results, each with a worked example.
These are the working formulas behind rate making and underwriting results. III does not publish a formula list for IC-45, so this is our own summary of standard practice, and the numbers in the examples are made up for illustration.
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Core Formulas
| Measure | Formula |
|---|---|
| Claim frequency | Number of claims / Number of exposure units |
| Claim severity | Total claims cost / Number of claims |
| Pure premium | Claim frequency x Claim severity |
| Gross premium | Pure premium / (1 - Expense loading % - Profit loading %) |
| Loss ratio | Incurred claims / Earned premium |
| Expense ratio | Expenses / Written premium |
| Combined ratio | Loss ratio + Expense ratio |
| Underwriting result | Earned premium - Incurred claims - Expenses |
| Retention share | Retention / Sum insured |
Divide, Do Not Add
A common slip is adding 30% to the pure premium, which gives ₹1,300. Loadings are normally a share of the gross premium, so you divide. At ₹1,300, the 30% loading would leave only ₹910 for claims.
Worked Example: Combined Ratio
Earned premium ₹100 crore, incurred claims ₹75 crore, expenses ₹30 crore, with written premium equal to earned premium.
- 1
Loss ratio
75 / 100 = 75%.
- 2
Expense ratio
30 / 100 = 30%.
- 3
Combined ratio
75% + 30% = 105%, an underwriting loss of ₹5 crore before investment income.
FAQs
What does a combined ratio above 100% mean?expand_more
Claims and expenses exceed premium, so the business made an underwriting loss before investment income.
What is the difference between pure and gross premium?expand_more
Pure premium covers expected claims. Gross premium adds loadings for expenses, profit and contingencies.
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