Concerning the ISO ER question in the Murzda Study Manual (1997 #4)
regarding trend, I think I agree with Lou for the purposes of the exam. By
interpreting the question "Does the AER include trend?" to mean "Is trend
considered in any of the calculations used to derive the AER?" I'm probably
reading too much into the question. Also, if the policies of the
experience period are all claims made, then no loading for IBNR will be
added to actual losses, and therefore no trend (detrend) will be considered
in the derivation of the AER.
The MSL question in the 1998 Murzda manual shows the second statement as
False.
Lou_Brown@ncci.com on 10/01/98 09:19:16 AM
To: studygroup9@lists.casact.org
cc: (bcc: John Pedrick/OPCS/INS)
Subject: Re: ISO Exper Rating
Concerning the problems with question A4 for ISO Experience Rating in the
Murzda Study Manual here is my insight:
First of all, (John) you mentioned that the "second statement that the AER
(Actual Experience Ratio) reflects losses capped
by the MSL is not necessarily false" tells me that the answer given (in
your manual) is FALSE for item 2 in the list. My answer key says that this
answer is TRUE (I have the 1996F edition) so I'm a little confused by your
statement. On page 6 of the ISO Exp Rating paper one can obviously see
that actual losses (that go into calculating the AER) are limited by the
MSL.
Second, I believe the AER excludes trend for the following reason. In the
calculation of the modification, one compares the AER to the EER (Expected
Experience Ratio). Both have to be on a consistent basis with respect to
development, trend, limited losses, etc. Development and limiting losses
are no problem, but with respect to trend we could either trend the actual
losses to bring them up to the current level contemplated by the EER or we
could detrend (untrend) the current losses (as defined by the basic limits
expected losses) to bring them back down to the level of the actual losses
(since they are from an earlier point in time). That is what is going on
here. The expected losses underlying the EER are detrended to bring them
down to the level of the AER, and, thus the actual losses themselves are
not trended. Further, your (John) statement that "since the AER includes
IBNR resulting from detrended expected loss, it would seem that the AER
does include trend" is mixing up two concepts. The calculation of IBNR is
the result of loss development so that the comparison (of the AER to the
EER) includes losses at ultimate level (the consistency basis noted above).
Trend is not an factor in this situation, but rather is taken care of
separately as noted above.
Hopefully this will clear thing up.
john.pedrick@ins.state.oh.us on 10/01/98 07:41:00 AM
To: studygroup9@lists.casact.org
cc: (bcc: Lou Brown/BOCA/NCCI)
Subject: Re: ISO Exper Rating
That's not all that bothers me in 1979 question #4. The second statement
that the AER reflects losses capped by the MSL is not necessarily false, it
just doesn't tell the whole story about ALAE being included. Since the AER
includes IBNR resulting from detrended expected loss, it would seem that
the AER does include trend.
I guess it's like baseball, or any sport with umpires or referees. We've
got to get beyond the winning mark with sufficient margin that a bad call
won't put us below the pass mark. Non illegitimi carborundum.
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