In the answer to some past questions (eg Apr 98, Paper 1, Q17) the examiners recommend to "adjust exposures to current levels if premium or other monetary amounts are being used". I found the same recommendation in one of the Acted P3 on-line tests. I am a bit confused about this. We were told in the tutorial that exposures should be modified (eg for LR calculations) only if information on rate changes was available, or if it could be assumed that rate changes were implemented to compensate for claim inflation, and the reasoning fully convinced me. After all, if last year we wrote £100m premiums, and all policies were for £100, and today we are still writing £100m premiums with policies still at £100 (all other things: cover, etc, being equal), doesn't that simply mean that we have an exposure of 1,000,000 policies last year as now and no correction is needed, regardless of claim inflation? So why do we need to adjust monetary values? Does anybody have a clarifying word on this? Thanks
for example in buildings insurance if the exposure measure is the sum insured-year then from year to year this can change because of buildings inflation. This is independent of the rate increases, so you need to adjust for this as well If the exposure measure is the number of rooms...then this can't change from year to year!
Thanks. THis makes sense. I guess that the problem is whether there is automatic indexation or not then.
