Limiting Premium Effect of a Single Variable (Non-Base Level)
Just confirming here; is the following statement true:
Statement:
The red circled indicated relativities are still the relativities that satisfy the given requirements in the question for levels B,C.
Internal thinking:
It makes sense to me that they would be still the same (as circled in red in the attachment) because the baserate increases covers for the shortfall in implementing the cap for level A., so the relativity for A would change, but not for B and C.
Thanks,
Cj
Comments
Yes, that's correct. I actually snuck in that exact observation at the very end of the example problem. See green box:
The relativity for B definitely is 1.0 because that's the base territory. And for the method presented in the text, the relativity for C stays the same too. (Note however that this is just one way to adjust the relativities to satisfy the given conditions. Technically there are an infinite number of ways this can be done but for this particular method you are correct that relativities for B and C stay the same.)
So the relativities for B and C stay the same because the premium shortfall is redistributed by simply increasing the base rate, then the indicated relativity for A is calculated such that it satisfies the maximum premium increase while backing out the base rate increase so there is no double counting effect?
Yup, that's pretty much the explanation.