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Foundations of Casualty Actuarial Science

(iv) Pure premium method produces indicated rates
whereas loss ratio method produces indicated rate
changes.

Q8. How on level premium is calculated?

Ans. On-level premium can be calculated using two
techniques. They are :
(a) Extension of exposure technique - Where, as is
generally the case, the experience period extends
over several years, there have been typically been
changes in manual rate levels over the time. If the
actuary uses the loss ratio method in the
development of the rate level changes, the earned
premium underlying the loss ratio calculations must
be on a current rate level basis. Re-rating each policy
using current rates manually is impossible but with
sufficient data and rating software the resulting
premium is quite accurate. This method us known
as Extension of exposure technique.

(b) Parallelogram Method - When on-level premiums
cannot be calculated based on Extension of exposure

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