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