For Property And Casualty Insurance: Introduction To Ratemaking And Loss Reserving

Unlike a manufacturer who knows the cost of raw materials before setting a shelf price, a P&C insurer must estimate the cost of future claims before collecting premiums. Furthermore, due to the "long-tail" nature of many liability lines (e.g., workers' compensation or general liability), claims may be reported and settled years after the policy period ends.

Both ratemaking and reserving revolve around the fundamental insurance equation: Unlike a manufacturer who knows the cost of