A rate index works in a similar way to any other index. So if you know that rates increased by 5% at the end of 2013 and by another 3% at the end of 2014, then rates in 2015 will be 8.15% higher than they were two years earlier, ie 1.03x1.05-1.
So to estimate the loss ratio for (underwriting year) 2015, you can take the 2013 loss ratio and divide by 1.0815. Of course, this assumes that all other factors remain constant, whereas in practice you'd also want to adjust your historical loss ratio for claims inflation / changes in mix of business etc.
It's easy to calculate rate changes for renewal business, by simply calculating "premium this year / premium last year -1". It's harder to calculate rate changes for new business because the insurer probably doesn't know what premium was charged by the previous insurer.
Last edited: Aug 18, 2015
