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Old 07-11-2019, 09:58 AM
ActurialDude ActurialDude is offline
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Default Ratio to on-leveled earned premium

In chapter 6 of the reserving text it states two diagnostic triangles to look at the ratio of paid claims to on-leveled earned premium and reported claims to on-leveled earned premium.

Why on-leveled? To me that doesnít make sense because the claims are for year XXXX but we are adjusting the premium to the rates that are changed in a future date.

Anyone have a clue why on-leveled earned premium?
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Old 07-11-2019, 10:43 AM
Jim Bedford Jim Bedford is offline
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Great observation and question. It certainly seems counterintuitive to have your numerator (claims) and denominator (premium) on different bases. It shows your really getting at why we do what we do, rather than just memorizing and regurgitating.

To understand why, you need to remember the purpose of this diagnostic: to look for trends in the claims. Raw claim data isn't very useful due to potential changes in exposure. Here we are using premium as our exposure basis. If we use unadjusted premiums, the trends down the columns of our claims ratio triangle will be affected by changes in both claims (the numerator) and premium (the denominator). If we on-level the premium (denominator) the trends we observe down the columns will be due to changes in claim amounts, as we want.

You're certainly right that we wouldn't want to use nominal claims divided by on-level premium for any type of projection, but in this diagnostic it is useful to isolate changes in claims levels over time.
Jim Bedford, FCAS, MAAA
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Last edited by Jim Bedford; 07-11-2019 at 11:03 AM..
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Old 07-11-2019, 10:59 AM
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Vorian Atreides Vorian Atreides is offline
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To add to what Jim posted, from practical experience . . . I was talking with a group of underwriters about an upcoming rate increase for a product line that they were claiming that had an increasingly favorable loss ratios (LR decreasing year over year).

I had to point out that in that interval of time, rate increases were also made (increasing the denominator) that could also easily produce those more favorable loss ratios.

I explained to them the basics of "on-leveling" the premium (and not the losses) and then reviewing the loss ratios as a way to isolate the loss experience more directly. Looking at the resulting loss ratios there showed a slight increase in loss experience.

After seeing that, a light-bulb went on for most of them.
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