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Q&A Bank 4.8(iii)

A

ActEdStudent

Member
In this question, we assume that the level of expenses and profit deduction in each year is to remain at 25% and 5% respectively. How come we then need to apply claims inflation to calculate the claims incurred in each year, rather than assume a constant loss ratio?
 
Not sure I follow your question....premium volume goes up each year, and inflation affects any outstandings each year, so will affect claims depending on when they are paid?
 
I think I have just got confused...

By 'net growth' does it mean net growth after allowing for claims inflation? I presumed that the premium written in year two would be 120% of premiums written in year one instead of 126% of premiums written in year one. Then in order to keep the loss ratio at 70% the claims incurred in year two would be 120% of the claims incurred in year one. But 'net growth' means after claims inflation?

Thanks.
 
Ah, I see the problem. Depends on how you define net, doesn't it! In the exam, then, I think it's best to say something like 'before/after adjustment for inflation', just to be on the safe side!
 
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