Page 109 - ic92 actuarial

Foundations of Casualty Actuarial Science

upon experience losses, which are trended projected
ultimate losses for the experience period under review,
and the exposures earned during the experience period.

Q5. Discuss the concept of loss ratio method.

Ans. The loss ratio method develops indicated rate changes
rather than indicated rates. Indicated rates are
determined by application of an adjustment factor, the
ratio of the experience loss ratio to a target loss ratio,
to the current rates. The experience loss ratio is the
ratio of the experience losses to the on-level earned
premium - the earned premium that would have
resulted for the experience period had the current
rates been in effect for the entire period. The formula
is as follows:
R = AR0
Where
R = indicated rate
R0 = current rate
A = adjustment factor = W / T
W = experience loss ratio
T = target loss ratio

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