questions on Pure Premium Method.

[hyc]

hello,
I need some help on pure premium method.
here is the formula,

Pure Premium=Loss/Exposure=Loss/Claim Counts * Claim Counts/Exposure=Frequency*Severity

my problem is, what kind of loss is it? earned loss, ultimate loss?

thx!

[hyc]

if it is earned loss, the pure premium will change as accident year developed over time. is it very strange?

[Vorian Atreides]

First, you might review (and master!) terminology for the types of losses. "Earned loss" isn't one of them--and it's not clear what you might mean by this term (translation--likely to lose points on the Exam using this term).

The type of loss (paid loss vs. incurred loss, vs. ultimate loss) is generally context dependent, and can be any one of these. If a problem isn't clear on the type of loss, look at what's presented and assume which ever type of loss would be easiest to address the given problem.

With the exception of aggregating losses on a calendar year basis, the pure premium will change as losses develop.

[hyc]

Originally Posted by Vorian Atreides

First, you might review (and master!) terminology for the types of losses. "Earned loss" isn't one of them--and it's not clear what you might mean by this term (translation--likely to lose points on the Exam using this term).

The type of loss (paid loss vs. incurred loss, vs. ultimate loss) is generally context dependent, and can be any one of these. If a problem isn't clear on the type of loss, look at what's presented and assume which ever type of loss would be easiest to address the given problem.

With the exception of aggregating losses on a calendar year basis, the pure premium will change as losses develop.

thx for ur answer & suggestion. I'm always confused by the terminology.

[RealFolkBlues]

While I agree with VA, I get the feeling that most often "Loss" will refer to the company's idea of projected ultimate loss. Why would we perform an indication that only takes into account losses without loss picks(Development) or IBNR? This would not be an indication of how to set a rate to produce premium that covers loss, expense, and return on equity.

[Vorian Atreides]

"Loss" is one of those ambiguous terms--both in practice and on the Exam--that without any qualifiers, the context often dictates what is intended.

In the syllabus material, you also have the synonym "Claims" that has the same issues.

On the Exam, if you see the term "losses" that is unqualified, look at what information you are given, and go with the easiest definition that will get you to the answer.

[Vorian Atreides]

Also, on short tail lines (like auto physical damage or home owners property coverage), paid or incurred losses are the expected ultimate losses for that line. They generally tend to not see much development (including having a very low IBNR estimate).