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Foundations of Casualty Actuarial Science

Mostly as a ratio to loss and allocated loss adjustment
expenses. Though generally the decision whether to
include allocated loss adjustment expenses depends on
the availability of data, there is one situation where it
becomes essential. Some liability policies contain limits
of liability that apply to both losses and loss adjustment
expenses. Where manual rates are being developed for
such policies, allocated loss adjustment expenses should
be treated as losses.

Q10. Trend and loss development "The Overlap
Fallacy" - Discuss.

Ans. It has occasionally being suggested that there is a double
counting of severity trend in the ratemaking process
where both loss development factors, which reflect
severity changes as development on unpaid claims and
severity trend factors are applied to losses. In 1970, Cook
delivered a paper on this. In order to make it clear let us
consider an example -

let the experience period be 1998 accident year and the
indicated rates are expected to be in effect from 7/1/99

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