1997 #32 - Clark

[Aces Wild]

This question asks to calculate the loss cost given a bunch of data. I am ok with everything except the premium on-level factor.

The question states "There will be a rate change of +10% on 1/1/97. Prior to this change, the last rate change was +5.0% on 7/1/89."

The historical accident years given run from 1991 through 1995, and the reinsurance treaty will be effective 1/1/97.

What I did, was on-level all premiums by multiplying by 1.1, but the all 10 solution multiplies by 1.05?

This makes no sense to me; if a policy was written in say 1988, I would multiply by 1.1/1.05 which is close to 1.05 but not quite. But in this case, all policies are written subsequent to the 5% increase and so the same policy written in 1997 would be at a rate 10% higher.

[2M]

The key piece of the problem is the words "losses occurring".

The treaty is effective 1/1/97 on a losses occuring basis, which means all losses that occur in the calendar year 1997. So you have to on level to the calendar year. The average earned date in CY 1997 is 7/1/1997. Thus, half the year will have the +10% rate change the other half will not.

The 5% rate change in 1989 is irrelevant to the calculation

[Aces Wild]

Thanks alot, that makes alot more sense now.