I don't understand the answer to problem 4's part c of sitting 11/2013 ! ! ! Please answer the bold red questions.
This is a rate indication problem, however the problem says that the assumption that premium is earned evenly does not hold, given that we're dealing with a new book of business. How exactly is premium not being earned evenly?--is it because premium is increasing from calendar year to calendar year, since the new business is expanding?
c) Fully discuss the impact to the rate level indication for State X by assuming the premium is earned evenly. Include the directional change to the rate level indication that would result if adjusting for the actual earning of the premium.
Answer:
(c) There are past rate increases and the volume of business written is expanding over time. Therefore, the past premiums were actually written at a higher rate level than if one assumed an even level of writing. (why?) Therefore, the on-level factors in part (a) are too high. Therefore, the on-level premium in part (a) is too high. Thus, the on-level ultimate projected loss ratio in part (a) is too low. Therefore, the indicated rate change in part (a) is too small.
Comment: If the volume of business written is expanding rapidly, then in theory one should also adjust the trend from dates; they would be somewhat later in time than in part (a). In practice such an adjustment would have a smaller impact than the adjustments to on-level premium in part (b), and is
rarely made.
This is a rate indication problem, however the problem says that the assumption that premium is earned evenly does not hold, given that we're dealing with a new book of business. How exactly is premium not being earned evenly?--is it because premium is increasing from calendar year to calendar year, since the new business is expanding?
c) Fully discuss the impact to the rate level indication for State X by assuming the premium is earned evenly. Include the directional change to the rate level indication that would result if adjusting for the actual earning of the premium.
Answer:
(c) There are past rate increases and the volume of business written is expanding over time. Therefore, the past premiums were actually written at a higher rate level than if one assumed an even level of writing. (why?) Therefore, the on-level factors in part (a) are too high. Therefore, the on-level premium in part (a) is too high. Thus, the on-level ultimate projected loss ratio in part (a) is too low. Therefore, the indicated rate change in part (a) is too small.
Comment: If the volume of business written is expanding rapidly, then in theory one should also adjust the trend from dates; they would be somewhat later in time than in part (a). In practice such an adjustment would have a smaller impact than the adjustments to on-level premium in part (b), and is
rarely made.
Q4 of 11/2013 Sitting - Discuss impact to indication assuming premium earned evenly
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