Chapter 5: Premium
What are the two types of premium to choose from for premium trend?
-Earned premium: more natural choice -Written premium: reflects shift in distribution more quickly
Two CRL methods:
-Extension of exposures -Parallelogram method
2 disadvantages of extension of exposures:
-Need detailed data -Long calculations
Two methods for adjusting historical data for premium trend:
-One-step trending -Two-step trending
Examples of causes of change in average premium level:
-Rating characteristics -Move of all existing insureds to a higher deductible -Purchase of the entire portfolio of another company
4 advantages of parallelogram method:
-Simple -Less calculations -Quicker to use -Individual policies not required
Definition of two-step trending:
Adjust each year's historical premium to the average premium level of the most recent point in trend data
Definition of parallelogram method:
Adjust the aggregated historical premium by an average factor to put the premium on-level
What does it mean to adjust the premium to the CRL?
Adjustment made for rate increases/decreases that occurred during the historical experience period
Disadvantage parallelogram method:
Assumes uniform distribution over time, not always true
Advantage of extension of exposures:
Most accurate
Definition of extension of exposures:
Rerating every policy to restate the historical premium to the amount that would be charged under the current rates
Definition of one-step trending:
Selection of a premium trend based on historical changes in average premium
When is two-step trending used?
When you expect the premium trend to change over time
