We have seen that premium levels are pretty much a guess for new products. For older products—and most insurance products are very old—the premium level is determined by expected loss levels. As we discussed, though, the real costs of a loss remain unknown until the claim is settled and the file closed, which in our highly litigious society can take many years. As a insurance products result, loss levels as well are in many cases no more than SWAGs.
America is a large country, and one would think that, over time, certain trends would appear to ease loss cost projections. Unfortunately, since each state has its own laws, which directly impact loss costs—and since in many cases the courts make up the insurance law as a claim is litigated—useful precedents are often difficult or impossible to find. In other words, that fact that the damage to your neighbor's wooden fence settled for $100 yesterday in no way implies that it will settle for the same amount when you knock it down again tomorrow. In fact, tomorrow's settlement may grow a hundredfold if your neighbor can tell his tale of woe to twelve jurors who hope to win a similar lottery in their own lifetimes. Do not despair, though: if you can prove that your neighbor's fence blocked your insurance view as you drove, perhaps the jury will anoint you the victim instead!
Pain and suffering, represented by a dollar value that can range from justice to a winning lottery ticket, depending on the mood of the jury.
The legal jurisdiction in which the claim is likely to occur. Juries in the city are very generous, as are those in California, Lower Texas and Florida.
The probable quality of the insurance claimant's legal representation, and whether the presiding judge might be appointed or might have to account for his actions during an upcoming election.
After accounting for these factors—collectively known as "case reserves"—pricing actuaries add "formula reserves" for intangible factors that affect the overall portfolio of claims, such as:
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