2016 Fall Q6(b)
One of the sample answers lists using premium-based projection method as a better alternative because it estimates fixed expenses more accurately. However it appears from the Werner text and battlewiki that the premium-based projection method is distorted by changing premium levels, and the question's scenario is one such that the overall premium is decreasing (perhaps due to a shift towards low premium risks). So shouldn't the premium-based projection method be not appropriate here? or am I missing something? Thank you for clarifying.
Comments
Your comment about the potential distortion of the premium-based projection method in scenarios where the overall premium is decreasing is correct. The premium-based projection method assumes a stable or predictable relationship between premiums and expenses. But when there is a shift towards lower premium risks, which results in an overall decrease in premiums, this method can indeed become less reliable.
It seems that for this problem however, all they were looking for was an improvement over the All-Variable method and they accepted any answer that satisfied that.
Also, while there was a slight decrease in premiums from 2013 to 2015, it isn't dramatic. If the graders had been testing whether you understood the effects of a decrease in premium on the expense calculation, they would likely have made the decrease a lot more obvious.