2017 Fall Q.5

daviddavid
in F-08-ExpectedClms

In general, should the on-level earned premium (if available) or the unadjusted earned premium be used to calculate the expected claims method ultimate?

For example, in this question, it appears that sample answer 2 used on-level earned premium to calculate ECR method ultimate, but other sample answers used the unadjusted AY 2016 earned premium of 3800 in calculating ECR ultimate.

Thanks in advance.

Comments

  • GrahamGraham

    In general, the on-level earned premium should be used to calculate the expected claims method (ECR) ultimate when it is available. This is because the on-level earned premium reflects the premium adjusted to a common rate level, which ensures that any changes in pricing due to rate changes are accounted for. This leads to a more accurate and consistent calculation of the expected claims ratio (ECR).

    So sample answer 2 seems more correct. The reason is that some policies that contributed to the 2016 EP were written in 2015, prior to the most recent rate change on Jan 1, 2016, and those policies would need to be on-leveled. (The policies written after Jan 1, 2016 would not need an adjustment because they would have been written at the current rate.)

    Sample answer 1 made the simpler assumption that 3800 EP was already earned at the current rate, which the examiners' accepted even though, strictly speaking, that wasn't quite true.

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