I am having a lot of conceptual difficulty understanding part of the solution to this question.
Premium itself is a function of expected losses, we wouldn't charge £1 million premium for a contract with £1,000 expected annual losses. There are other soft factors that determine a premium, but a key component is the expected claims that will be incurred.
Therefore, by definition, this will account for claims inflation, as the expected losses year-on-year will increase (or decrease) with claims inflation.
As a result of the above, rate change, as is confirmed by Lloyd's in their PMDR guidance, must be net of claims inflation.
One of the acceptable solutions for this question in the Examiner's report states:
- Outline factors to consider when determining how much credibility to give to premium rate changes in a reserving exercise.
Premium itself is a function of expected losses, we wouldn't charge £1 million premium for a contract with £1,000 expected annual losses. There are other soft factors that determine a premium, but a key component is the expected claims that will be incurred.
Therefore, by definition, this will account for claims inflation, as the expected losses year-on-year will increase (or decrease) with claims inflation.
As a result of the above, rate change, as is confirmed by Lloyd's in their PMDR guidance, must be net of claims inflation.
One of the acceptable solutions for this question in the Examiner's report states:
- Is it including or excluding claims inflation?