Page 117 - ic92 actuarial

Foundations of Casualty Actuarial Science

Q11. Discuss the concept of target loss ratio.

Ans. The application of loss development and trending
techniques to the underlying loss data produces the
trended projected ultimate losses, which are the
experience losses underlying the application of either
the pure premium or the loss ratio methods to produce
the indicated rates or rate changes. For illustration
purposes the general concepts involved in the reflection
of expense provisions in manual rates, assume both that
the loss ratio method is being combined with the
experience losses. We then need to develop a target
loss ratio as such :
1-V-Q
T=
1+G
Where
T = target loss ratio
V = premium-related expense factor
Q = profit and contingencies factor
G = ratio of non-premium-related expenses to losses

In order to develop the target loss ratio we therefore
need factors for premium-related and for non-premium-

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