Rate change query

[Jun Wu]

Dear All

Hope you are well.

For burning cost questions, is it correct that we don't need to apply rate change to the exposure (if it is a monetary amount) to bring it to the level of the rating period? We do this for inflation for loss amounts, so why not exposure?

I have only seen burn cost calculation questions where we are given the exposure in say number of cars, premium volume, but never has to on level it. Therefore my burn cost is = trended loss / original exposure for each year.

But for pricing for reinsurance treaty questions, we always have to find on level loss ratio which involves adjusting premium to the rating period level.

Am I missing something?

Thanks and good weekend!
Jun

 

[Aman Sehra]

Hi,

There are lots of approaches when it comes to burn cost. In your example above, we are looking at costs of claims per unit of exposure. So, for example, if there are 10 car accidents per 10,000 cars insured, then for 12,000 cars insured, we would (very crudely) say we expect 12 car accidents.

I suggest reading through the start of Chapter 14 section 2.1, as this goes through what is and isn't included in a burning cost analysis. After doing so, if there are any specific questions that you could do with some assistance with, do put something on the forums.

Aman
ActEd Tutor