if one insurance company collects $75.00 premium for a policy,
the company will expect to pay:
loss: $48.375 (64.5%)
fixed expenses: $ 4.800 ( 6.4%)
variable expenses: $21.825 (29.1%)
which implies that
total expenses: $26.625 (35.5%)
loss and fixed expense: $53.175 (70.9%)
loss and variable expenses: $70.200 (93.6%)
Do you think I am right up to this point?
Then, the bottom part of this page says, current base rate is
$75. My question is what is this $75? loss? loss and fixed
expenses? The article says that the assumption is current rate
is adequate, that sounds like the $75 covers everything, i.e.
loss and fixed expenses and variable expenses. Does this make
sense?
Finally, the exhibit calculates a variable base rate as
($75) * (0.645) / (0.709) = $68.2299....(rounded as $68)
What is this $68? loss? loss and variable expenses?
I think if you believe that the $75 is loss and fixed expenses, the
$68.2299 can cover you to pay the loss. You need to load the $68
rate for fixed and variable expenses for your final rate. Is this
what they want to say? Then, the $75 is not a adequate rate at
first place (or you may say it's an excessive rate for only cover
loss).
Thanks for your help.