What basis do insurance companies use to determine expected losses?

Insurance companies primarily use past experience of the average risk as the basis for determining expected losses because historical data provides a reliable framework for understanding how similar risks have performed over time. By analyzing previous claims, loss ratios, and other relevant statistics, insurers can identify patterns and trends that help them predict future loss experiences. This empirical data allows them to set premiums, reserves, and other financial strategies effectively.

While current market trends and projected future trends do play a role in influencing insurance practices, they are not as foundational as historical data in the calculation of expected losses. Regulatory requirements might govern operational practices but do not directly impact the assessment of expected losses based solely on risk experience.