Claims incurred versus earned premium

[Lewin]

Hi guys,I passed this course last year,but some concepts are still haunting me at work.

Claims incurred =paid claims +change in OCR.

I am struggling to understand how this formula is consistent with Earned Premiums during a year.

Reason being,paid claims include claims with loss dates from earlier years but paid in current year,but earned premiums only relate to current year?

Why are claims from prior years that are paid in current period included??

 

[Darren Michaels]

The outstanding claims reserves at the previous year end should make allowance for claims paid in the current period but incurred in prior periods. If these have been acurrately estimated then the impact on incurred claims in the current year will be zero as the paid claims will be offset by an equal and opposite reduction in the outstanding claims reserves.

 

[Lewin]

Thank you sir!

It's now clear.Final question

Does this mean that if company was perfectly reserved at end of say 2016,then the claims incurred in 2017 in the p&l at end of 2017 would really be expected ultimate claims estimate for all claims with a loss date 2017? (Assuming a short tailed class)

 

[Darren Michaels]

yes that's correct (although you don't need the bit in brackets at the end).

 

[Adithyan]

Thank you sir!

It's now clear.Final question

Does this mean that if company was perfectly reserved at end of say 2016,then the claims incurred in 2017 in the p&l at end of 2017 would really be expected ultimate claims estimate for all claims with a loss date 2017? (Assuming a short tailed class)

This is true only when all claims of previous years are paid using OCR of 2016 end right? Only then the claims incurred for 2017 would be equal to ultimate of 2017 correct?