Hi, I have a question regarding the premium rate adjustment to the loss ratio. 1) When we take the EP increase between x and x+1 to be the average of the u/w year rate change between x-1 and x+1, what is our assumption in terms of timing of rate changes? I don't get the same answer if I do the calculation properly whether I assume rate changes at mid-year or beginning of year. The way I do it is: For rate changes beginning of year WP03:WP04:WP05= 100/1.1 : 100 : 0.95 Therefore EP05/EP04= 1.021429 For mid-year changes I get 1.0673 The solution says it should be 1.025 which is quite different! 2) Also the question says that we should assume that the premium rate increases include exposure inflation. Is this consistent with the claims inflation assumption i.e. does this also mean that the 8% claims inflation includes exposure increases? Thanks!
The 2.5% (rounded to 3% in the Report) is the average of +10 and -5. So I guess the assumption is rate changes made 'evenly throughout the year', if you can have such a thing! I'd hope that your methods would have been acceptable too. For the exposure inflation thing, I think the key point is that you realise (and comment on) the fact that the premium rates changes shown may or may not allow for exposure changes, and similarly for any allowance for inflation.
1) Thanks. If you assume that rate changes are made throughout the year then to calculate it you can assume that they happen on average mid-yearly? I don't think the average is correct. At least that's not how they calculate EP changes in April 04 Paper 2 Q2(iv). If I use that method I get 1.0673 2) So to summarise either both claims inflation and premium rate increases should include exposure increases or not. Is that right? (which makes the solution assumption that premium rate increases include exposure increases wrong!) Many many thanks!
1) By the looks of many recent past questions examining 'earnings patterns calcs', it sounds like pretty much any method will do, approximate or otherwise, as long as you draw the appropriate conclusion. I agree that the 'average' approach is very rough and ready - yet they'd obviously have accepted it. So if the opportunity arises to make life simple, take it! I think where more work is required, is when they're very specific about the data given, for example in A04, Paper 2, Question 2(iv) - where lots of marks will have been for the calculation. 2) When I read the solution to this (and maybe I didn't look closely enough), I just took it to mean that when you're analysing premium rate changes, make sure you understand whether or not they allow for exposure changes. And when you're adjusting things for inflation, also make sure you understand the effects of any exposure changes. Overall, the aim is to make sure that any adjustments for exposure changes are correctly allowed for when messing around with inflation and premium rates, making sure you don't double count nor ignore it totally.
Thanks! Very useful to know when we should concentrate on doing things the "correct" way and when we should just give a v.rough approximation!
