Feldblum - 2000 #47

[justin777]

Can some explain to me how fixed expenses are a percentage of premiums but they are also trended.

The question states the "Fixed" expense trend = 4%
but it also says renewal policies have fixed expenses of 5%.

Can someone explain to me how the 2001 fixed expense is 54.08.

Thanks.

[Commander Keen]

Fixed expenses aren't a percentage of premium? Or maybe the first year fixed expense is a percentage of premium? i don't remember.

[alphaace]

the way feldblum does it in his paper, is that you calculate what would of been the renewal fixed expense in the first year and then trend it appropriately.

Thus in this case its 1000*.05*1.04*1.04

[2M]

This problem has been discussed here a few times before.

Renewal policies are 5% of initial premium of 50.00 for the first year. However, there are no renewals in the first year.

The second year will be 4% higher than the first year and the third year will be 4% higher than the second year.