I could not understand the following clearly. If someone can explain me here what is implied below in detail, if possible with the help of an example, it would be great... Chapter 13 page 9 under the heading Why the assumptions used as a reserving basis may differ from those used in rating We then make further assumptions to project the experience forward to the period to which the new premium rates and the corresponding claims will apply (ie claims inflation, changes in exposure etc). The ultimate assumptions are therefore those we consider appropriate for rating in respect of future periods that extend beyond the periods that are relevant to assessing the liabilities in respect of existing business. For this reason alone the ultimate assumptions may be different to those that might be used for reserving purposes. Any help is much appreciated. Thanks very much in advance.
Hi vidhya36 Here is an example which might help. Suppose you have carried out a reserving exercise and as part of that exercise you have estimated the ultimate claims cost for the 2015 accident year. The average accident date for this cohort is mid-2015. So your estimate is appropriate for accidents that happen on average in the middle of 2015. You do not need to adjust this estimate any further for your reserving exercise. Now lets say you you wish to use this estimate to set your premium rates for business written in 2017 (ie the 2017 underwriting year). Policies in the 2017 underwriting year incept on average in the middle of 2017 and assuming annual policies and that the risk is uniform over the policy period, the average accident date for the these policies is six months later, ie at the end of 2017. You therefore need to adjust your prior estimate for 2.5 years worth of claims inflation, from the middle of 2015 until the end of 2017. You would also need to adjust it for any changes in exposure between the previous business written (which gave rise to the claims in 2015) and that which you plan to write in 2017 etc.
