International House Corporation (IHC) began operations this year. The company retains property losses and estimates that property losses will be $260,000 this year. Property losses are expected to increase by 25 percent per year for the next two years. Use the Excel future value function to find the losses in year 2 and year 3. IHC expects to pay 92 percent of property losses in the year the loss occurs, with 8 percent paid in the following year. How much in retained property losses is IHC expected to pay this year and in each of the next two years?
Calculate the losses and retained property losses for each year
Liability exposures often are described as having a “long tail,” meaning that significant time can pass before all claims are reported, investigated, and settled. Loss development factors are multipliers that can be applied to claims settled to date to estimate what the ultimate claims for a period will equal.
Based on past workers compensation claims data, TRS’s risk manager estimated loss development factors of 5.2 for year-end values one year ago, 4.3 for year-end values two years ago, 3.7 for year-end values three years ago, 2.6 for year-end values four years ago, and 1.2 for year-end values five years ago. Workers compensation losses settled to date for the previous five years are as follows:
5 Years Ago
4 Years Ago
3 Years Ago
2 Years Ago
Based on the loss development factors and claims settled to date, what are the ultimate claims expected for each of the past five years?
Calculate the claims expected in each year