Actuarial Outpost Rate Changes (in percentage)
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#1
09-22-2010, 06:56 PM
 paulbernal Member Join Date: Oct 2009 Posts: 105
Rate Changes (in percentage)

Hello guys,

I am reading an article called Estimating Unpaid Claims Using Basic Techniques by Jacqueline Friedland Version 2, July 22, 2009 and there is a part that has a table containing the following columns:

1-Calendar Year (2002 to 2008)
3-Rate Changes (in percentage)
4-Cumulative Average Rate Level
5-Annual Exposure Change (in percentage)

The article explains how to calculate colums 4 and 5 (Cumulative Average Rate Level and Annual Exposure Change) but since calculation of these two columns depend on the Rate Changes information, my question is the following:

How do I calculate the rate changes? Would my Rate Change for 2003 be calculated doing the following:

Or does this article refers to other way to compute de rate change from one year to another?

Any help would be greatly appreciated....

Paul
#2
09-23-2010, 09:10 AM
 MLC CAS AAA Join Date: Aug 2010 Location: Massachusetts Posts: 7

You could get the rate changes (and details as to how they were calculated) from the historical rate filings implemented by the insurer. You'd have to convert from a written to an earned basis: e.g., a +6% rate change implemented on Jan. 1 would have only a +3% effect on that year's earned premiums.

I think Friedlander is trying to get at management's historical thinking re: needed rate level over the period. Filed rate changes give a better idea of that than changes in average premiums (which can be affected by things other than management's strategy).
#3
09-23-2010, 10:41 AM
 paulbernal Member Join Date: Oct 2009 Posts: 105

Thanks a lot MLC.

Letīs suppose that the company has no historical rate filings. Couldnīt I derive those rate changes by either taking the ratio of Pure Premium Year(t) / Pure Premium Year(t-1)

Thanks again for your valuable help
#4
09-23-2010, 11:15 AM
 MightySchoop Member CAS AAA Join Date: Aug 2009 Location: the freekin' moon! Posts: 3,217

Quote:
 Originally Posted by paulbernal Thanks a lot MLC. Letīs suppose that the company has no historical rate filings. Couldnīt I derive those rate changes by either taking the ratio of Pure Premium Year(t) / Pure Premium Year(t-1) or by doing Gross Premium Year(t) / Gross Premium Year(t-1) or Earned Premium Year(t) / Earned Premium Year(t-1)? Thanks again for your valuable help
Not always. Rate changes take some time to phase in, as the policies written at the old rates renew at the new ones. And in any case, you'd need exposure information as well, so you don't mistake a growing book of business for a rate change.

Also, like MLC said above, your average rate charged can change even without a rate change. For example, most insurers have a "model year" factor for their auto policies. As insureds replace older cars with newer ones, the average rate charged goes up even without a rate change.
#5
09-23-2010, 12:02 PM
 paulbernal Member Join Date: Oct 2009 Posts: 105

Thanks a lot for your valuable contribution.

Best regards,

Paul
#6
09-23-2010, 04:00 PM
 silverfox Member CAS SOA COPA Join Date: May 2005 Favorite beer: Westmalle Tripel Posts: 13,479

Your exposure could change too. You'll need to adjust for shifts in the classes of business you write as well as for changes in deductibles and limits.

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