View Full Version : Cape Cod and Adjusted Premium

actuaryshmactuary

04-15-2012, 12:20 PM

The formula for expected claim ratio uses adjusted premium. In the 2011 exam, question 27, there is no adjusted premium, so you just use earned premium for that formula, and apply it to earned premium to come up with expected losses. In 2010 Q18, both earned premium and adjusted premium are given. The ECR is applied to adjusted premium.

Is it safe to assume that if you are given adjusted premium, you apply the ECR to adjusted premium vs. earned premium? The example in the paper doesn't specifically address this since it does not have adjusted premium.

Thanks.

John Doe

04-15-2012, 01:19 PM

Is it safe to assume that if you are given adjusted premium, you apply the ECR to adjusted premium vs. earned premium? The example in the paper doesn't specifically address this since it does not have adjusted premium.

Yes, at some point Friedland mentions that the B-F and Cape Cod methods should use adjusted premium whenever possible. So if you are given both it's always better to use adjusted premium.

Vorian Atreides

04-15-2012, 06:34 PM

Note that "adjusted premium" is basically the same as on-level premium--it's adjusted for rate changes to a common year's rate level (usually the latest year).

So, when ECR = sum adjusted reported losses / sum adjusted used-up premium, this is the loss ratio to apply to the latest year's premium (note that adjusted premium = earned premium in this case). To apply this ratio to other accident years, you need to adjust the ECR to the rate level and benefit level of the year in question.

If the losses are not needing to be adjusted (as is the case for 2010 #18), then applying the ECR to the adjusted premium will result in the same numeric answer as "unadjusting" the ECR to the appropriate year. What you're seeing is a "shortcut" that was accepted by the EC for that sitting.

Friedland mentions that it's better to use the adjusted premium whenever possible to calculate loss ratios for the various methods; but not to calculate the dollar need for a given AY of analysis.

actuaryshmactuary

04-15-2012, 07:30 PM

If the losses are not needing to be adjusted (as is the case for 2010 #18), then applying the ECR to the adjusted premium will result in the same numeric answer as "unadjusting" the ECR to the appropriate year. What you're seeing is a "shortcut" that was accepted by the EC for that sitting.

Friedland mentions that it's better to use the adjusted premium whenever possible to calculate loss ratios for the various methods; but not to calculate the dollar need for a given AY of analysis.

So would the correct way to answer 2010 #18 be "unadjusting" the ECR since we are calculating an expected dollar amount? I'm just wondering what happens should something like this show up again, knowing that the shortcut gets you to the same answer, in less time.

Vorian Atreides

04-15-2012, 07:47 PM

If given the same type of problem (one where there's no adjustment to losses), then it's a case of "six of one, half dozen of another". The "correct" answer would be to unadjust the ECR, but if time becomes an issue (something you should know about yourself), I would do the short cut and work for an appeal if you feel you were graded incorrectly.

However, if there are adjustments to losses that need to be made (either loss trend or tort reform), then you'll need to unadjust the ECR.

actuaryshmactuary

04-15-2012, 08:01 PM

Thanks for the help, VA. Appreciate it.

Vorian Atreides

04-15-2012, 08:08 PM

:toth:

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