Net Insurance Charge for Retrospective- Spring 2014 Q11
Hi Graham - I feel like the text is not entirely clear on when to multiply the Net Insurance Charge by both the Expected LR and LCF and when we can just use it as provided in the problem (without adjustment). Secondly, in sample solution #2, they give the impression that if the net insurance charge is presented as a ratio then we should "convert" it (or multiply it by Expected LR and LCF) otherwise we are good to use it as is. That left me confused. Is there something to a Net Insurance Charge being presenting in decimal format, ratio format, or percentage format that lets us know whether we need to "convert" it or not? I would love to hear your thoughts because I don't understand why it even matters in the first place. Thanks!
Comments
Since it is so close to the exam, my recommendation is to follow sample answer 1 (since that's the clearest) and ignore the others. There is an example in the wiki that's very similar to this exam problem. See this section:
Sample answer 2 only gives the same answer as sample answer 1 because the lower bound is applied but the preliminary retrospective premium is different so something strange is going on in sample answer 2. The text implies that the insurance charge is always a ratio anyway so I don't understand the comment about having to state the assumption that the net insurance charge is a ratio.
This type of problem is dealt with much more fully in Exam 8 so any question you'll see on Exam 5 should be very basic. You should only have to substitute the given information into the formulas without any tricks. Check the BattleTable for a few more exam problems on this topic and if you can solve those, you'll be fine.
That's helpful, thanks!