when we calculate the growth factor, why do we use the "excess" growth instead of just the expected growth of the company? in other words, why do we need to use the maximum of 0 and (expected company annual growth MINUS average industry annual growth)?
Comments
Recall that the excess growth factor for a company is calculated relative to industry growth. If both the industry and the company are growing at the same pace, the increase may simply by due to population growth and that would be ok.
But if the company were growing much faster than the industry this could be due to aggressive marketing and/or underpricing and this could lead to a deterioration in the company's loss ratio over time. In other words, growth in excess of industry growth could signal future problems. That's the reason the charge only looks at excess growth.
Thanks graham, that makes sense and i understand now!
Awesome!