A while ago, some anonymous person posted this question. I would like to know
the explanation if it has been answered.
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
On page 132 of the Foundation book, towards the middle of the page, it says
Standard Premium = Manual premium modified for experience rating, loss constants,
and minimum premium excluding premium discount and EXPENSE CONSTANTS.
What's going on here? After reading the WC paper by Feldblum, it says Standard
Earned Premium is defined as "after the application of experience rating plan
adjustments, loss constants, and EXPENSE CONSTANTS." So when should the expense
constants be applied?
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