Hi, The solutions suggests a second approach whereby we assume that the returns are based on underwriting years......etc. I follow what the solution is doing but don't understand how this is correct theoretically? The questions asks for an accident year estimate? So how can we use an average of 'on-levelled' UW ULR's for an AY estimate? I would have thought the first approach was the only correct approach based on the data provided i.e assume returns are on an accident year basis, and adjust written rate to earned to restate, allowing for inflation. Thanks
The problem is the data provided doesn't make it clear whether it is on an accident or underwriting year basis, which is why the examiners decided to give credit to students that assumed it was on an underwriting year basis instead. Having come up with an estimate for the ULR for the 2012 underwriting year, you would then need to make a further assumption as to how much of that relates to the 2012 accident year (in other words a suitable earnings pattern) in order to answer the question in full.
