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View Full Version : TIA 5A Quiz 10 #1

diputz42
05-01-2011, 12:32 AM
Ken takes the 2008 Average WP and develops and trends that to use as an on-leveled and trended average premium and multiplies that by the exposure base for each year. That didn't make much sense to me as using latest year WP with AY losses for a LR doesn't seem to be as consistent as using CY EP with AY losses.

I took the CY EP*EEx for each year and on-leveled and trended that using parallelograms. This gave me a slightly different LR, 0.70 vs Ken's 0.67. Which in the end moved my indication from Ken's -4.3% to a +2.16%. Is either approach or the other "more correct"?

Vorian Atreides
05-01-2011, 01:01 AM
Neither approach is "more correct".

Ken's method assumes (perhaps implicitly) that the average rate plan factor remains the same from 2008 to the on-level time period. In essence, Ken's method is an extension of exposures method of on-leveling; and it doesn't require "uniform writing" of policies.

Your approach assumes that policies are written uniformly over the historical period, but doesn't need to assume that the average rate plan factor remains consistant into the future. However, your method is far more calculation intensive than Ken's proposed solution. By the time you get your on-level factors for your method, someone using Ken's method will have finished the problem (except for a few last calculations) and ready to tackle the next problem in their queue.

diputz42
05-01-2011, 01:22 AM
So in layman terms, the 08 average WP is assumed to be the "on-level" premium as of 2008 and only need to be adjusted for the 2009 rate change and trending?

Further, for any problem that involves on-leveling premium where both average EP and WP are given, is it safe to use latest year WP as the "on-level" premium for that year and adjust for subsequent rate changes and trending?

Vorian Atreides
05-01-2011, 01:26 AM
In a nutshell, yes. Technically, the latest AWP isn't so much as "on-level" as being the best representation of the mix of business of the book being priced.

diputz42
05-01-2011, 02:19 AM
In a nutshell, yes. Technically, the latest AWP isn't so much as "on-level" as being the best representation of the mix of business of the book being priced.

Thanks! By the way, how the hell do you have so much time to answer 5A questions when you're studying for 5B?? Not that I'm complaining... :notworth: