Composite Rating Exhibit
For each type of loss, the adjusted projected ultimate losses and ALE is
calculated by AY and in total. This calculation involves a (multiplicative)
factor to convert from Claims-Made to Occurrence, which presumably is only
applied to the Claims-Made portion of the losses (not all of them), to put all
of the losses on an equivalent basis. Trend, LDF's, and other (multiplicative)
factors are also applied in this calculation. So far so good?
To calculate the adjusted premium for the experience period, the adjusted
projected ultimate losses and ALE are then multiplied by a conversion factor,
this time from Occurrence to Claims-Made, and divided by the Expected Loss and
ALE ratio. I am assuming the Occurrence to Claims-Made conversion factor is
simply the inverse of the Claims-Made to Occurrence factor. Now, if the
conversion factor is applied only to the originally claims-made portion of the
losses, then the two factors cancel one another in the calculation and then
would appear to have no purpose. But if all of the losses are converted to
Claims-Made, then why not do that in the first place?
Are the Occurrence losses used to develop a trend factor, or for some other
intermediate purpose?
The adjusted premium is divided by the adjusted (i.e. trended) composite
exposure to arrive at the composite rate; so my question boils down to whether
the rate should be purely a claims-made rate, or a combination of claims-made
and occurrence. There is no further use of conversion factors suggested in the
exhibit in calculating the final rate.
Question 2 ...
Is it bothering anyone else that Brockmeier and Kelley both give 7 or 8
factors/developments that might lead to changes in the ITV level, but their
lists bear no resemblance to each other? Any suggestions out there on how to
distinguish (and remember) which items belong on whose list?
Signed,
Stumped at Fireman's Fund