Hi, can you help me understand the calculation done on sept 07 q7ii where they have derived the 2007 loss ratio based on the 2002-2006 data given (which is written premiums and incurred losses.) we are told there was a rate increase in 2004 at 10% and 1% claims increase over the period. The answer shows inflated index and premium index - I can’t figure out how these are calculated. thanks Anj
Hi Anj The inflation index is calculated as 1.01^t , so that the older claims are increased by an extra 1% each year. The premium index is calculated in a similar way. However, for most years the premium increase was zero. In fact there was only one premium increase of 10% in 2004. So all the years prior to this have their premiums increased by 10% to bring them into line with the current pricing. I hope this helps. Best wishes Mark
thanks so much, that all makes perfect sense apart from one thing. why do all the years prior to 2004 have their premiums increased if the rate increase wasn’t until 2004? I think I’m missing something on this point. Thanks so much for your help.
Hi Anj We want to do all our calculations in a consistent way. That means looking at the claims in today's money terms and the premiums at today's premium rates too. Premium rates haven't changed since 2004, so everything from then onwards already has premiums at the current rate. So it is the premiums from before 2004 that need to be increased by 10%, because they were written on the older lower rates. Best wishes Mark
