Calendar Year Experience

What Is a Calendar Year Experience?

A calendar year experience is used in the insurance industry to signify an insurance company's "experience" during a calendar year. Also known as an underwriting year experience or accident year experience, it is the difference between the premiums earned and the losses that have been incurred (but are not necessarily occurring) within a 12-month accounting period—regardless of whether the premiums have been received, or the losses have been booked or paid.

Understanding Calendar Year Experiences

When an insurance company writes or renews a policy, it receives an insurance premium as payment for its troubles. These revenues should exceed ordinary business costs, together with any money paid out to clients in the event that they file a satisfactory insurance claim.

The difference between revenue and costs is the income, or, in the case of insurers, the underwriting income. A calendar year experience is the insurance company’s underwriting income. It tells us the profit generated through its course of business by measuring the premiums, the amount of money an individual or business pays for an insurance policy, and losses entered on accounting records during the 12-month calendar. 

Insurance underwriters insure people and businesses by weighing up the risks and determining the premium to charge to insure that risk. A calendar year experience is used to indicate whether premiums effectively cover an insurer’s losses.

An insurer’s calendar year experience is, therefore, a measure of how well a company underwrites insurance and its ability to evaluate risks. To be profitable, calendar year experiences need to be greater than 1.

Calculating a Calendar Year Experience

A calendar year experience is calculated in the following way:

Calendar Year Experience = Accounting Earned Premium / Incurred Losses and Loss Adjustment Expenses (LAE), the cost associated with investigating and settling an insurance claim, for all losses.

Incurred but not reported (IBNR) losses, and changes to loss reserves—an estimate of the amount an insurance company will have to pay out on future insurance claims on policies that it has underwritten—are also taken into consideration when calculating losses.

Special Considerations

Note that the company may earn a premium or incur a loss at one point in time and receive or pay out the cash associated with those events later. In other words, this means a calendar year experience is not necessarily a measure of how much cash an insurer kept, collected, or disbursed in a 12-month accounting period.

Calendar Year Experience vs. Policy Year Experience 

Insurers also sometimes use policy year experiences to measure losses against earned premiums.

Where they differ is that the calendar year experience looks at losses from claims made during a specific year, whereas the policy year experience looks at how a specific set of policies—those that come into effect during the year—are exposed to losses.