Present Average Company Rate Method
Hello,
Detrend factor 5B adjusts for both pure premium trend and exposure trend. What is the difference between these trends?
Thank you!
Hello,
Detrend factor 5B adjusts for both pure premium trend and exposure trend. What is the difference between these trends?
Thank you!
Comments
The standard approach using detrend factor 5b adjusts for both pure premium and exposure trend because we assume the same BLEL across all years (varies by subline within a year though). Whereas, the present average company rate method explicitly controls for the changes in exposure (BLEL now varies by subline and year) so we only need to account for pure premium trend.
The pure premium trend accounts for changes in the loss cost of indemnifying the insured. The exposure trend accounts for changes in the underlying value being insured.
Thank you. What do you mean by underlying value being insured? Like Car-years?
By underlying value, I mean something which reflects how the risk is changing over time. Common examples include business payroll for general liability (as rising payroll suggests more employees and thus greater exposure/risk), or amount of insurance years (AIY) for homeowners insurance which reflects how the replacement cost of a home is changing over time.
Car-years would be more tricky to use because it's not materially changing over time for a single vehicle. Potentially it could be used in something like a fleet context.