Ratio of Paid Claims to On-Level Earned Premium

[david849]

I have a general question regarding the usefulness of the ratio of paid claims to on-level earned premium which is described in Friedland (P69). My opinion is since the numerator (loss) is not adjusted but the denominator is (premium), this ratio will increase over time (assuming a stable book) because of inflationary trend in loss. So it is not valid to use the upward trend in this ratio to conclude speed-up in payment. Can anyone point out whether i am missing anything here? Thanks.

[Vorian Atreides]

I have a general question regarding the usefulness of the ratio of paid claims to on-level earned premium which is described in Friedland (P69). My opinion is since the numerator (loss) is not adjusted but the denominator is (premium), this ratio will increase over time (assuming a stable book) because of inflationary trend in loss. So it is not valid to use the upward trend in this ratio to conclude speed-up in payment. Can anyone point out whether i am missing anything here? Thanks.
Most of these tests using ratios will not be definitive for a single "cause" of changes in loss data.

As for the paid claim-ratio (to on-level premium), seeing an increase as you look down a column (same age, different AY) could be explained by an increase in settlement at that age, deteriorating losses (which may or may not be due to inflation), or some combination of these two.

The point is that you'd need to look at other tests to see if either of these sources could be valid (e.g., looking at paid-to-reported ratios and/or reported claims ratio).

[david849]

Thanks VA. just wanted to verify that deteriorating loss is also a possible explanation since the text doesn't seem to mention it.