In short the claims frequency is the number of claims that have occurred in a given period for example the previous year of insurance.
How do underwriters use claims frequency?
Underwriters assessing the risks under a policy will can compare the claims frequency under that policy against the normal frequency for risks of that type.
Whilst past performance is no guarantee of future performance, it is often the case that risks that suffer a larger number of claims than the norm will continue to do unless action is taken to reduce the probability of future losses by a process of risk management.
Where the risk of future claims cannot be reduced then the underwriter will take appropriate action that reflects the increased chance of claims. This action may take the form of increased premiums, increased excesses or even reduction or removal of cover completely.
On the other hand, where a policy has a lower claims frequency than the norm, then the underwriter can reward this with reduced premiums or improved terms for the client.
How do actuaries use claims frequency?
The insurance company actuary is engaged in a much broader review of the insurer’s business than the individual policies of policyholders.
Actuaries perform analysis of both the insurers complete book of business and also of the individual classes that make up this business. The claims frequency is an important part of this process as it can suggest the number of future claims that will be made in an area and combining this with claims quantum, the total value of claims can be predicted.