April 2012 Q6 i rate change

Discussion in 'SP8' started by ciza5, Apr 12, 2015.

  1. ciza5

    ciza5 Member

    Should the rate change not begin with the change from 2010- 2011? To bring 2010 premiums to 2012 levels you would need to multiply by .9 (100%-10%?), and 2009 would be multiplied by .945?(1.05x0.9) etc. I don't understand why the examiners leave out the change from 2010-2011.
     
    ciza5, Apr 12, 2015
    #1
  2. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    The rate changes provided are titled "Rate change on previous year" so the premiums written in that year will already allow for that change.

    So to adjust the 2010 premiums to 2012 level, you increase by 5% to get them to 2011 levels and then by a further 0% (as you are told rate change is zero from 2011 to 2012) to get them to 2012 levels. Total adjustment required is therefore 1.05.
     
    Darren Michaels, Apr 13, 2015
    #2
  3. ciza5

    ciza5 Member

    I've come across a similar question (1991 paper q1) however in the solution for this question the rate change begins by bringing 2014 to 2015 levels, although from what I understood on your response this should already be included?

    For april 2012 I've calculated the following:
    Year Index
    2007 .89776
    2008 .945
    2009 .945
    2010 .9
    2011 1

    For 1991
    2009 1.401
    2010 1.273
    2011 1.273
    2012 1.158
    2013 1.103
    2014 1.05
    2015 1

    These are the changes I get if I approach each question the same way, I'm
    Obviously misinterpreting something, could you please explain the difference between these two? And how to determine which approach to use in the exam.

    Thank you,
     
    Last edited by a moderator: Apr 23, 2015
    ciza5, Apr 22, 2015
    #3
  4. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    Do you really mean 1991? If so, I'm afraid I don't have that question to hand, I'd have to have a good hunt around, unless you can give me an idea of what it was asking?

    But let me have a go at answering anyway, to see whether this helps:
    For pricing, you need to put all past premium data (and claims of course) onto an 'as-if' basis, ie as if you were selling the business when you'll be planning to. This means taking past premiums and adjusting for the historic rate changes so that you get an idea of what you would bring in if you sold the business today (or whenever you'll be selling it).
    Lots of ways of doing this, although the method should result in an identical answer - you could either just increase all the old premiums by the historical rate changes, compounding up (as in Darren's reply above), which to me is the easiest way of understanding it. OR - you could create an 'index', which is effectively the multiplier you use to apply to each historic premium (in other words, each index value is the compounded figures). OR - you could create another 'index', which you divide into the premium. Really, that index would just be like the reciprocal of the multiplier index of course. Maybe that's what you've done differently for the two questions? But you should find that you get the right (same) answer either way, as long as you've divided or multiplied (and compounded) correctly.

    Hope this makes sense!
     
    Ian Senator, Apr 23, 2015
    #4
  5. ciza5

    ciza5 Member

    Hi Ian,

    Yes it was 1991, it was a question provided in the tutorials I was just trying to find a similar question as I seem to calculate the rate change incorrect everytime I approach one of these questions.

    I understand the concept of bringing the premiums to an 'as if' basis, my confusion with the origanal question (2012) is that I don't understand why we don't Strip out the 2010 decrease of 10%
     
    ciza5, Apr 23, 2015
    #5
  6. ciza5

    ciza5 Member

    I think I've just realsied what the problem is, I've been working off the revision booklets which appear to have a typo as they say 2011 has decreased by 10% from 2010, whereas the exam paper say that 2011 has increased by 5%.
     
    ciza5, Apr 23, 2015
    #6
  7. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    Ah, that'd be it! The correction is on our website already, by the way.
    Sorry for the confusion.

    Ian
     
    Ian Senator, Apr 23, 2015
    #7
  8. Sumrah Shafiq

    Sumrah Shafiq Member

    Why is the ultimate gross premium for 2011 multiplied by 12/10?
     
    Sumrah Shafiq, Mar 23, 2024
    #8
  9. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    The 2011 year is only 10 months developed. (It renews on 1st June, and data is as at 31st March).
     
    Katherine Young, Mar 25, 2024
    #9
  10. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    The data provided is at 31 March 2012 and the annual contract runs from 1 June each year, so you need to gross up for the premiums estimated to be received in April and May 2012.
     
    Darren Michaels, Mar 25, 2024
    #10

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