Calculating a 14-month trend

When dealing with an insurance renewal or switching carriers, you’re going to have to explain a 14-month trend to your client.

But can you do it clearly? In case you need some pointers, here’s an explanation of how underwriters specifically use past claims loss experience to predict future losses.

In theory, the most recent 12 months of claims data would be used to calculate the required renewal adjustment. In practice, however, insurance companies tend to incorporate 14 months of trend into their analysis.

Read: Renewal rate: What factors are used?

This is because trend is essentially a monthly factor despite being quoted as annualized, says Brent Delveaux, benefits consultant of TRG Group Benefits & Pensions Inc. in Vancouver.

“If you have a policy year of October to September, the actual renewal date would probably be December (or January),” he says. “Since the actual renewal rate adjustment is two months after the end of the experience period—and since trend grows month-to-month—the additional trend of two months needs to be included in the analysis, and this produces a 14-month trend factor.”

If the renewal date were January as opposed to December, then the insurance company would incorporate 15 months of trend into the analysis instead.

“Trend calculations can be a contentious issue among advisors,” says Delveaux.

He adds, “While I understand the argument for cumulative trend, I don’t always agree with using it for all clients.”

Read: Insurance in 2012 and beyond

Though Claude Ferguson, director actuarial services for Medavie Blue Cross in Montreal, applies a slightly different approach, he reaches a similar conclusion.

The trend rate, he says, is determined by the average time elapsed between the experience period used and the projected period up for renewal.

“For example, where a 30-day notice is required on a contract renewing January 1, claim information available from November 1 to October 31 may be used to develop the experience adjustment needed.”

He adds, “One way to depict the number of months separating both periods—the experience period and the projected period—is to calculate the time elapsed between the mid-point for each period such as May 1 for the first period to July 1 for the second period—which totals 14 months.”

Thus, if a 12% annual trend rate were expected to impact claims over both periods, those incurred during the experience period would be increased by 14% to estimate the expected claim level for the upcoming insurance period.

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