You aren't actually given a separate exposure trend here. You're given a pure premium trend and the pure premium trend is indeed applied in column (c) of the examiners' report solution.
When the graders said a common error was applying an exposure trend, I think what they were referring to was people applying the 3% trend to just the exposures in column (a). But if you were going to do that, you would also have to apply the 3% trend to the losses in column (b) and then the trend would cancel out anyway.
In other words, if you applied the 3% trend to just the exposures, you would get a lower pure premium and your final answer would be too low.
So the 3% annual expected exposure increase is just telling us that the exposures are increasing by 3% every year (but this is NOT a trend for exposures, and thus it is not applied to exposures)?
(Note: I didn't notice they gave a separate exposure trend of 3%, which just happened to be the same as the 3% pure premium trend.)
In any case, when you apply the 3% pure premium trend, this accounts for trends in the losses and exposures at the same time (because pure premium = losses / exposures). If you then applied a separate exposure trend to the exposures you would be double-counting the trend.
So your choices are these:
Apply only a pure premium trend (as was done in the problem)
Comments
You aren't actually given a separate exposure trend here. You're given a pure premium trend and the pure premium trend is indeed applied in column (c) of the examiners' report solution.
When the graders said a common error was applying an exposure trend, I think what they were referring to was people applying the 3% trend to just the exposures in column (a). But if you were going to do that, you would also have to apply the 3% trend to the losses in column (b) and then the trend would cancel out anyway.
In other words, if you applied the 3% trend to just the exposures, you would get a lower pure premium and your final answer would be too low.
So the 3% annual expected exposure increase is just telling us that the exposures are increasing by 3% every year (but this is NOT a trend for exposures, and thus it is not applied to exposures)?
(Note: I didn't notice they gave a separate exposure trend of 3%, which just happened to be the same as the 3% pure premium trend.)
In any case, when you apply the 3% pure premium trend, this accounts for trends in the losses and exposures at the same time (because pure premium = losses / exposures). If you then applied a separate exposure trend to the exposures you would be double-counting the trend.
So your choices are these: