I don't really understand the approach to trend the step 2 trend (prospective trend) using the (Most Recent Average CRLWP Per Exposure)/(Average CRLEP per exposure by year).
Firstly, I don't understand why we just don't use a prospective step 2 trend that is the same as the step 1 trend of 2%, when the experience indicates a very steady 2% trend. Why would we assume the step 2 trend would be different?
Secondly, I don't understand the above approach used in Exhibit A. Is it considered more accurate because we use the average crlep in the actual indication, and ep develops slower than wp due to the implicit lag by earning out the wp. In actuality is this step 2 trend not really a prospective trend but just making sure that CRLEP catches up to CRLWP? I thought the point of the step 2 trend was to take the trend from the current period to the future period where you expect to take the rate changes from the indication.
I remember reading chapter 5 and not really understanding the reason for this approach. If anyone could shed some light and explain anything I misunderstood that would be greatly appreciated. Thanks!
Firstly, I don't understand why we just don't use a prospective step 2 trend that is the same as the step 1 trend of 2%, when the experience indicates a very steady 2% trend. Why would we assume the step 2 trend would be different?
Secondly, I don't understand the above approach used in Exhibit A. Is it considered more accurate because we use the average crlep in the actual indication, and ep develops slower than wp due to the implicit lag by earning out the wp. In actuality is this step 2 trend not really a prospective trend but just making sure that CRLEP catches up to CRLWP? I thought the point of the step 2 trend was to take the trend from the current period to the future period where you expect to take the rate changes from the indication.
I remember reading chapter 5 and not really understanding the reason for this approach. If anyone could shed some light and explain anything I misunderstood that would be greatly appreciated. Thanks!
Exhibit A Prospective Premium Trend Question
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