Exposure Trend

Comments

• Graham

  September 2023 edited September 2023

  I think a valid solution would be NOT applying the exposure trend to the premiums in the denominator because the statement of the question wasn't completely clear. Let me explain:

  • An exposure trend of 1% means you have 1% more policyholders.
  • If you have 1% more policyholders, it's reasonable to assume you also have roughly 1% more premiums and roughly 1% more losses.
  • That means you should trend both losses and premiums by this 1% exposure trend (although it would cancel out anyway) but the examiners' report solution only applied the 1% trend to the premiums in the denominator, not the numerator. The implication is that the loss dollars you were given already had the 1% trend applied to them, but the problem didn't mention that.

  I think whoever wrote the CAS solution didn't think this through. The point is that the exposure trend needs to be applied both the losses in the numerator and the premiums in the denominator, in which case it cancels out anyway so the simplest solution is NOT to apply it at all. But if it has already been applied to the loss data in the numerator (which they don't tell you) then you have to apply it in the denominator also.