Re: Premium Trend Periods
Nanza ( Nanza@aol.com )
Tue, 3 Mar 1998 21:23:38 EST
Let's not get too complicated here. Why do trend premium? Because the
premium we expect to take in will be greater than what we have received in the
past. Ignoring non-inflation sensitive exposure bases which should get NO
trend adjustment, there remains only two questions to be answered. Namely,
when did we receive premiums in the past, and when can we expect to receive
premium in the future. To simplify things, we assume that premiums are
written constantly, or the premium written for a particular year is
distributed uniformly. With this assumption in place, all premium for a
future period received midway through the policy duration is arithmetically
equal to a constant inflow of premium throughout a time beginning on the
effecitve date, and ending one policy duration after the effective date. In
other words, for a one year policy period, all future premium is assumed to be
collected six months after the effective date. For a six month policy period,
all future premium is collected three months after the effective date. For
historical premium the same assumption applies. On a calendar year, policy
year, or accident year basis, premiums are assumed to be collected
continuously throughout the year. Assuming that the experience period for a
particular year runs from January 1 to December 31, this means that a single
premium inflow on July 1 is identical to the prior assumption. So, premium
should be trended from July 1 to midway past the effective date. In short,
expected future premium equals past premium adjusted by inflation.
interesting to note that the assumptions mentioned can be altered like the
Miller and Davis exposure method for new or declining books of business.
Whew! Did anybody read this whole thing? Did it make sense? Was it
accurate? Feel free to let me know.