Help! Try to understand ISO CGL E&S rating

[abc123]

I am totally confused with the article and would really appreciate your help. I will start with the very basic concept I have trouble with.

Actual experience ratio
AER = (Actual limited losses + ARULL)/ (Company subject Loss Cost)

“Actual Limited losses” is calculated from the losses occurred during the experience period.
ARULL (Adjustment to Reflect the Ult Level of Losses) as well as “Company subject Loss Cost” is calculated from the “Projected Basic Limit Premium”, which is unrelated to experience period. What does this AER mean? It is not really "Actual experience".


Why are EER(Expected experience ratio) and MSL functions of company subject loss cost?


Thanks.

[glad]

Originally Posted by abc123

I am totally confused with the article and would really appreciate your help. I will start with the very basic concept I have trouble with.

Actual experience ratio
AER = (Actual limited losses + ARULL)/ (Company subject Loss Cost)

“Actual Limited losses” is calculated from the losses occurred during the experience period.
ARULL (Adjustment to Reflect the Ult Level of Losses) as well as “Company subject Loss Cost” is calculated from the “Projected Basic Limit Premium”, which is unrelated to experience period. What does this AER mean? It is not really "Actual experience".


Why are EER(Expected experience ratio) and MSL functions of company subject loss cost?


Thanks.

First of all, download "Individual Risk Rating" from the Part 5 Webnotes (Margaret Tiller Sherwood) and also her "Individual Risk Rating" paper from the webnotes. (M.W. Tiller) These papers are much easier reading than the ISO paper.

This is the way I look at it. The "actual experience" is losses (limited) plus ALAE and then limited to the MSL (max. single loss).

You want ultimate losses, so you need to add "ARULL", which is the IBNR. You are basically calculating the IBNR using a BF technique. You take the Company Subject loss cost X EER X (% Unreported). the % unreported is the table B ldf's.

Company Subject loss cost = BL Prem X Expected Loss Ratio X detrend factor.

based upon the total Company Subject loss cost, you use table C and get
credibility
EER (expected experience ratio) and
MSL

1. so the first thing you want to calculate is the company subj loss cost.
2. then you calculate experience losses (just limiting loss to BL and then add ALAE, then limit total to MSL)
3. then you calculate IBNR and add to 2.
4. then you divide 3. by 1. to get AER
5. mod = (AER - EER)/EER X Z

I've only read through this once, and haven't done many problems, so I can't answer your question, why are EER and MSL functions of the Company Subject loss cost. I just know that you calculate the Company Subject Loss cost, and then look up that number in the table C (begins on page 14 of the paper). When you find your Co. Subj Loss cost, you just read over in the table and get cred, EER and MSL.

hope this helps!

[abc123]

This certainly helps. But when calculating ARULL, why do you use the projected BL premium instead of the premium of each experience period?

[glad]

Originally Posted by abc123

This certainly helps. But when calculating ARULL, why do you use the projected BL premium instead of the premium of each experience period?

you are bringing everything down to basic limits. The losses you are using are limited to basic limits as well.

[SamAdams]

This post helped me out - I thought it might help someone else out as well.

I was getting confused as to why old exam problems used the term LDF when calculating the ARULL when it's really not, it's a % unreported factor.