Example C- 2 step trending

judyohjudyoh
edited August 2023 in W-06-LossLAE
Screen Shot 2023-08-31 at 3.45.49 PM.png
Screen Shot 2023-08-31 at 3.45.42 PM.png

The first screenshot is from premium two step trend and the second screenshot is Example C two step trending for losses. My understanding is that period 1 starts for AWD for policies earned during the historical period, so in Example C that would be Jan 1 2021 and the end is the midpoint of latest period available so Nov 15 2022 as in Example C, and period 2 ends with the AWD for policies written during the effective period so in Example C that would be July 1 2024.

Does loss trending only use AAD (which would be equivalent to AWD) and no "policies earned ..." in the period calculations?

Also, how is the step 1 (of 2-step trend) adjustment factor calculated? For premium trend, the adjustment factor is latest AWP @ CRL / historical AEP @ CRL.

Comments

  • GrahamGraham

    For loss trending, yes, use AADs.

    For step 1 of 2-trending for losses, the formula is similar to the step 2 adjustment factor:

    • (untrended losses) x (1 + trend)^(trend period)

    See this old exam problem:

    In that exam problem the total trended losses (using a separate trend for frequency and severity) are calculated using a 2-step using this formula:

    image.png

    Note that for that problem:

    • untrended losses = 15,000
    • (step 1 severity trend) = (step 2 severity trend) = 5%
    • (step 1 frequency trend) = 6%
    • (step 2 frequency trend) = -7%%

    Putting all that together gives the final result of $17,405.25

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