Underwriting Year
Study guide: Exam 5
Underwriting Year (UY), also called treaty year or contract year, groups all premium and losses by the year in which the reinsurance contract became effective (incepted). It is the Policy Year concept carried into reinsurance, where the contract being tracked is a treaty rather than a single policy.
\text{UY } n \text{ Loss Ratio} = \frac{\text{Losses ceded under contracts incepting in year } n}{\text{Premium on contracts incepting in year } n}
- On a direct book, underwriting year and policy year are the same thing. The distinction matters in reinsurance, where a
1/1/2024treaty covers a whole portfolio of cedant policies written throughout2024, each of which then runs a further12months. - That stacking makes UY the slowest-developing basis of all. A single
1/1/2024annual risks-attaching treaty is exposed to accident dates through the end of2025. Underwriting year2024also holds the contracts incepting later in2024: one effective12/31/2024covers policies written through12/30/2025, with accidents as late as12/29/2026. The underwriting year's accidents therefore span three calendar years, a36-month window (Friedland). - The offsetting advantage is an exact match of premium to exposure: the ceded premium, the commission, the reinstatement premiums and the losses in a UY all belong to one set of contract terms — attachment point, limit, and treaty conditions — so the cohort's profitability is measured against the deal that was actually struck.
- UY is frequently used by European reinsurers and at Lloyd's, and reinsurers often estimate ultimate losses by UY even where they report by accident year. At early UY maturities the cumulative development factors are highly leveraged and the premium is not fully earned, which is where the expected and BF methods take over from the chain ladder.
- Converting between bases loses information: a UY triangle cannot be re-cut into accident years without claim-level accident dates, which is one reason ceded data quality is a recurring problem in reinsurance reserving.
How Long a
\;2024Treaty Stays Exposed A quota share treaty incepting1/1/2024covers all12-month policies written by the cedant during calendar2024. The line has an average reporting lag of nine months.Over what period can accidents and reports attach to underwriting year 2024?
Answer The last policy subject to the treaty is written
12/31/2024and runs through12/30/2025, so:
- Accident dates run
1/1/2024through12/30/2025— a24-month exposure window.- With a nine-month average reporting lag, reports keep arriving well into
2026, and the tail of the reporting distribution runs years beyond that.At
12months of maturity (12/31/2024) the treaty's premium is only about half-earned and only a fraction of one year's accidents have been reported. This is why a UY12-month chain ladder estimate is unusable and reinsurers lean on an a priori loss ratio at early maturities.
Same Claim, Three Cohorts A cedant writes a general liability policy on
7/1/2024, subject to a treaty effective1/1/2024. A claim occurs3/15/2025and is reported6/20/2025.Place the claim on the underwriting-year, policy-year and accident-year bases.
Answer
Basis Cohort Driver Underwriting Year UY 2024 treaty effective 1/1/2024Policy Year PY 2024 policy incepted 7/1/2024Accident Year AY 2025 loss occurred 3/15/2025The reinsurer books this loss against premium it earned on a treaty struck
15months before the accident. Nothing is wrong with that — the treaty premium was priced for exactly this exposure — but it explains why the reinsurer carries IBNR on UY 2024 for years after the cedant's own AY 2024 has largely settled.