This was a big problem in the early eighties when interest rates were in
the stratosphere. So called "paid loss retros" were common and it seem
that since you get the retrospective premium later, you ought to charge
more for the contract.
I addressed this problem by calculating an aggregate loss distribution
at various settlement lags and calculated the expected retrospective
premium at each lag. With this, you can calculate the present value of
the retrospective premium, and adjust your insurance charge (or other
plan factor) to get you the "right" present value.
I wrote up this in a paper titled "The Cash Flow of a Retrospective
Rating Plan" which was published in the PCAS around 1986.
I was actually working for your company when I implemented this and I
believe a PC version of these ideas is still being run by Brian
Montigney.
Glenn Meyers
Insurance Services Office, Inc.
Internet: gmeyers@iso.com
Voice:(212) 898-5938
Fax: (212) 898-6060
----------
From: Lawn,Yin [SMTP:Yin.Lawn@cna.com]
Sent: Friday, June 26, 1998 4:58 PM
To: casnet@lists.casact.org
Subject: Discounting insurance charge in Table M
Hi,
Does any body have any ideas(or articles and papers)on how to
discount
insurance charge for time value of money? I don't think current
table M
reflects time value of money associated with insurance charge.
Is there
anyway to modify current procedure to obtain a discounted excess
loss
ratio from table M? Maybe a formula for shifting column just for
insurance charge discounting? Thanks.
---Yin Lawn
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