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asile
03-27-2012, 12:26 AM
In this problem, you are given frequency, severity, exposure and premium trends and asked to calculate trended loss ratio. The answer does not use the exposure trend.

I thought premium trend adjusted for distributional shifts, or mix changes, etc and exposure trends were for inflation sensitive exposure bases. As long as premium trend is calculated net of exposure trend there is no overlap.

Why is exposure trend not used in this problem? I thought fully adjusted premium required adjustment for rate level, development, exposure base inflation and premium trend?

There is an old thread on this but it didn't clear much up for me.

Vorian Atreides
03-28-2012, 09:24 AM
Keep in mind that this is an older Exam and had different reference material that may have some specific details.

I'm pretty sure that given that this is a MC question, the intent was to see if the candidate understood the difference between exposure trend and premium trend; and here, I'm pretty sure the writer was intending to have "premium trend" interpreted in it's broadest definition--any changes in the average premium over time regardless of the drivers.

Furthermore, in the problem, what's the exposure to which you need to apply an exposure trend to? For ratemaking, you need to apply an exposure trend only to an inflation-sensitive exposure base. While "number of insureds" can be an exposure base (and seems to be the implied basis here given its "superfluous" inclusion with the data), it's not inflation sensitive. So there's no need to include it in the LR trending.